Investors should buy technology stocks after their months long sell-off entered bear market territory, according to Fundstrat.
“Investors deem Technology ‘done’ but we think Technology demand will accelerate [over the] next few years.”
These are the three reasons why Fundstrat’s Tom Lee thinks investors should buy technology stocks.
Technology stocks went from most loved in years of the COVID-19 pandemic to now the most heavily sold, based on the underlying sector performance of the stock market.
The Nasdaq 100 fell into a bear market in 2022, dropping about 30% from its record high, which is a larger decline than the index experienced in March 2020. A combination of lofty valuations, a pull forward in demand, and rising interest rates helped fuel the months-long decline in the sector, among other factors.
But investors should take advantage of the decline and start buying the tech sector, according to a Monday note from Fundstrat’s Tom Lee. “Investors deem Technology ‘done’ but we think Technology demand will accelerate [over the] next few years,” Lee said.
Lee offered three big reasons why it still makes sense to own the tech sector for the long-term, even as more traditional economy sectors like energy continue to soar.
1. “Technology demand will accelerate as companies seek to offset labor shortage.”
“Global labor supply is shrinking versus demand. Our 2017 analysis shows the world is entering a period of labor shortage. Growth rate of workers age 16-64 is trailing total population growth, starting in 2018. This reverses worker surplus in place since 1973,” Lee explained.
The global labor shortage is a long-term opportunity for technology and automation to step up and fill the gap, according to Lee.
“2022 is accelerating the use case and ROI for automation. If minimum wages are rising, [and] companies are raising starting salaries, this raises the ROI and justification for labor replacement via automation. This is an obvious demand accelerator for Technology — aka $QQQ Nasdaq 100,” Lee said.
2. “Technology valuations are lower than the 2003 trough.”
The Nasdaq’s price-to-earnings ratio today is lower now than it was at the depths of its dot-com unwind, when the Nasdaq 100 declined by nearly 80% from its 2000 peak, according to Lee. “Nasdaq 100 is cheaper today than at the absolute 70-year low of 2003. Yup, markets crashed worse than dot-com,” Lee said.
“If anything, this should affirm why the risk/reward in FAANG is attractive. Even anecdotally, the bad news seems priced in,” Lee said.
3. “Technology has led off every major bottom.”
“What outperformed after dot-com crash? Technology stocks… yup. The demand story for Technology is likely set to accelerate in next few years, and every major market bottom sees Nasdaq bottom 4-6 months ahead,” Lee said.
After the both dot-com bubble burst and the Great Financial Crisis, the Nasdaq outperformed other indices over the next five years, according to Lee. “This chart says it all… we think FAANG lead post growth scare,” Lee concluded.
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