The near-correction in the stock market experienced last weekend particularly affected stocks in the technology sector. However, it masks a more prolonged decline in technology on the stock market. Most notably Canadian tech, whose value has fallen 30% in Toronto since last summer’s highs. Is it worrying?
National Bank Financial answers in the negative. In a note to investors, analysts Richard Tse and John Chao speak instead of a return to normal for a good part of the Canadian technology sector. “There is certainly some market disinterest in tech stocks,” they write. Yet the economic foundations for these societies have not changed. Should we revise our forecasts downwards given the current drop? We do not think so. »
At Nasdaq, the composite index of the New York Technology Exchange has erased in recent days all the gains accumulated since May 2021. We can even go back to mid-January 2021 if we exclude a slight improvement associated with a first spring deconfinement which will have been of a relatively short duration.
There have certainly been a few peaks and records reached by tech giants since then. Apple’s capitalization reached US$3 trillion at the start of 2022 and the Californian company was closely followed by Microsoft at US$2.5 trillion. In the United States, six of the ten largest publicly traded companies are still in the technology sector. With us, the e-commerce specialist Shopify, which was for a time at the top of the Canadian stock exchange companies, has descended to the third level, behind the Royal Bank and the Toronto Dominion.
The best (probably) to come
National Bank experts believe that the turbulence of the past few days, or even months, is only temporary and that in the longer term, the patient investor will recover from the observed depression. Companies like Shopify or Montreal’s Lightspeed “continue to be leaders in their respective markets” and would represent rather good investment opportunities these days, given their current price, they believe.
According to them, 2022 is shaping up to be a better year for buyers than for sellers for another reason: high inflation in recent months. It should lead to a rapid rise in interest rates by the end of the year. Historically, the higher the interest rates, the lower the value of technology stocks. “We believe that we will see good investment opportunities appear in the sector in 2022, especially in the long term,” summarize the analysts at the National Bank.
Volatility doesn’t help either, they add. The famous VIX index of stock market volatility is currently doing very well. He flirts these days with the tops of the last two years. Which, except for slightly cynical speculators, is not exactly good news, since this index embodies a certain pessimism, if not uncertainty among investors.
IBM, the canary in the mine?
Provided that the current week does not completely capsize the ship. If the sell-off that began when Netflix published very disappointing quarterly results last Thursday continues this week, this stock market optimism could be short-lived.
By Friday, Apple, AMD, Intel and Tesla will take turns releasing their own respective quarterly results. The nature of these results will be decisive for the evolution of the stock market over the next few days. Looking further ahead, analysts are eagerly awaiting their executives’ forecasts for the quarter and year ahead to form a definitive picture of the sector’s economic health.
It was first up to IBM and Microsoft to share their results on Tuesday, and the market reaction seems to confirm the nervousness of investors. IBM experienced the strongest sales growth in ten years in the last quarter. This led to a rise in its share price, a spirit cooled by the refusal of its CEO, Arvind Krishna, to make growth forecasts for the earnings per share of his company.
Microsoft also saw its revenues jump 20% compared to the same quarter last year. Despite everything, its title continued to fall after the close of trading on Tuesday evening. High inflation and an uncertain supply of electronic components for at least another year are giving investors pause.
If no tech this week declares the shortage of components over, markets will continue to be turbulent for a long time, analysts predict. Given the usual similarity in the evolution of the Canadian and American stock markets, if the results expected on Wall Street were to disappoint this week, the entire North American technology sector could bear the brunt.