Wall Street sees positive in recent tech selloff
Some of Wall Street’s biggest players view the recent sell-off in the stock market as a wave of turbulence, not the start of a longer recession..
Invesco this week named sharp drop in Nasdaq «a healthy period of consolidation», while fund manager Lord Abbett said the valuation of US stocks probably deserves attention based on an analysis of companies’ earnings.
On September 4, Goldman Sachs reaffirmed its year-end price target of 3,600 for the S&P 500, which is about 6% higher than the index close on Wednesday, while UBS Global Wealth Management recommended to clients «pour to the markets», and not stay away.
Their optimism illustrates how the Federal Reserve’s promise to keep interest rates at record lows and hopes for a breakthrough in the development of a COVID-19 vaccine have underpinned market growth this year. That being said, many still fear that the US presidential election and huge stock options in the tech sector could exacerbate market volatility in the remaining months of 2020..
«We think we are going through a healthy correction that eliminates foam, said Troy Gayesky, co-director of investment director at SkyBridge, an alternative investment company. – Of course, we could fall even more. But if you are a technology investor, you must understand that the ratings were very high.».
The Nasdaq posted its best day since April on Wednesday, the day after falling into a retracement zone, usually defined as a 10% or more drop from its recent peak. Other major indices also rebounded on Wednesday after sharp falls.
«I think of this drop not so much as a correction, but as a digestion», – stated Christina Hooper, Chief Strategist for Global Markets, Invesco.
Reported profit S&The P 500 for the second quarter was 23.1% above expectations, well above the five-year average of 4.7%, Lord Abbett analysts write in a recently published note..
«Profit dynamics and the scale of revenue revisions are outpacing those in other markets. This suggests that the higher valuation of US stocks deserves attention.», – the report says.
However, some believe that more volatility is expected. A recent investor poll from UBS Global Wealth Management found that 65% see politics as their main concern, with only a month and a half left until the US presidential election on November 3.
Famous investor Stanley Druckenmiller, who is skeptical of this year‘s rally, made another bearish statement on Wednesday, warning CNBC that the stock market had gone off the chain with the support of the Federal Reserve.
Uncertainty over SoftBank Group Corp’s huge option purchases also looms over the markets, creating another risk.
Skybridge’s Gajeschi said he sees the potential for increased risk for the stock market if a sharper fall occurs. For example, if Nasdaq falls by 20%, or S&P 500 will decrease by 15% from the corresponding highs. At the same time, the Fed continues to expand its balance sheet.
«Any sale outside of the big tech stocks that pushed the markets higher could be a sign that the pullback could continue.», – considers Willie Delvish, investment strategist Baird.
In the coming days, Delvish expects signs of growing investor caution – such as buying put options, outflows from equity funds and a decrease in bullish sentiment in polls, which indicate that excessive sentiment euphoria is not going away..
«Another indicator is the reaction of investors to key levels of technical support.», – said Kate Lerner, Chief Market Strategist Truist / SunTrust Advisory. For example, the Nasdaq closed below its 50-day moving average on Tuesday for the first time since April, but returned above it on Wednesday..
«If you see these markets just cutting through support levels, it is a sign that sellers are taking over.», – said Lerner.