Can Tech Make a Comeback?

Despite a choppy couple of months, US stocks continue to do quite well so far in 2024. The S&P 500 has climbed more than 20% through the first three quarters of the year, gaining in eight of the first nine months. Further, it’s hit a new all-time high in seven out of nine months so far in 2024.

However, something seems to be missing.

That thing? Tech.

The Nasdaq 100 hasn’t hit a new high since mid-July.

The tech sector finished just below flat for the third quarter, and while that sounds fine on the surface, it’s not very impressive when it was the second-worst performer among the S&P 500’s 11 sectors. It’s even worse when considering that nine of those sectors gained at least 5.8% in the quarter.

This type of performance is atypical of tech — particularly in a bull market.

Tech generally enjoys a leadership role in the market, with the Nasdaq 100 outperforming the S&P 500 on an annual basis in 14 out of the last 20 years (70% of the time) and in 12 of the 15 years since 2008 (80% of the time). Lastly, going back over the last decade, the Magnificent 7 has outperformed the S&P 500 in 33 of the last 40 quarters.

Both groups — the Nasdaq 100 and the Magnificent 7 — underperformed the S&P 500 in Q3.

Will that change going forward?

Rotation, Rotation, Rotation

We were bullish on utilities earlier this year because the valuation and earnings expectations were attractive, and for seemingly the first time in a long time, utilities had an exciting catalyst. That catalyst was AI, which has been a well-discussed catalyst for tech, too.

However, tech hasn’t languished as the unloved, unattractive sector like utilities have. Instead, it’s been the poster child for growth, excitement and profits. And generally speaking, it’s been rewarded for showcasing those qualities.

Until lately.

Year to date, tech is just the fifth-best performing sector. That middle-of-the-pack performance becomes even more drowned out as each S&P 500 sector is up more than 10% year to date on a total return basis.

The bull market has spent the last year expanding in breadth, with more stocks and sectors participating in the move higher. This breadth expansion is incredibly healthy and an overall positive for the bull market’s longevity, and while it hasn’t necessarily come at the expense of tech — the sector is still up about 20% on the year — tech hasn’t been participating the way it usually does.

Earnings

Tech may not have what investors would consider a cheap valuation compared to its recent history, but it’s not like the sector is failing to deliver solid growth.

As earnings season begins, the tech and communications sectors are expected to post the largest year-over-year growth at 14.9% and 12.6%, respectively. It’s worth noting that Meta, Alphabet and Netflix make up almost 50% of the Communications ETF (XLC). Conversely, the S&P 500 is only forecast to grow earnings about 3.5% year over year for the upcoming earnings period.

That seemingly sets a low bar to hurdle for the market as a whole, but sets a high bar to hurdle for tech. That argument would have much more merit if tech was a strong performer at this point and if it were leading the market. But given how much of a laggard it has been, perhaps a strong quarter of earnings can serve as a reminder to the high quality nature of this sector and attract more fund flows.

So long as the bullish pillars remain in place for equity markets, it’s a reasonable expectation for the Nasdaq to join the S&P 500 and Dow in making new all-time highs — particularly that it’s now just a stone’s throw away from doing so.

Getting Technical

When we look at the charts, it’s clear that the Nasdaq has failed to make new highs. However, it has recouped a bulk of its recent losses, and now, it’s putting in a series of higher lows and higher highs. That’s a positive technical development for bulls, as the index tries to regain some momentum and as earnings growth remains strong.

So how do investors participate? Outside of buying individual stocks in the sector, they can consider ETFs, like the Invesco QQQ Trust (QQQ) or the Technology Select Sector SPDR Fund (XLK).

Certain investors could also consider options as one approach.

Bullish traders might consider something like calls or call spreads to take advantage of a continued move higher. In this scenario, options buyers limit their risk to the price paid for the calls or call spreads, while trying to capitalize on a bounce in the stock. It may be advantageous to have adequate time until the option’s expiration, while some investors may prefer to wait for a potential pullback before establishing a long call or call spread position.

While bulls could also look to collect income from the trade in the form of a bull-put credit spread, others may consider using puts as a way to speculate on a pullback in tech stocks. For example, they may consider buying puts or put spreads if they believe lower prices are in store.