Technology stocks plummet, signaling a reversal; Wall Street sounds the "bottom-fishing" horn

China Financial Information (CFIC) March 30 (Editor Xia Junxiong) Analysts say that although large-cap technology stocks have been sold off in recent weeks—pushing the Nasdaq 100 index into a technical correction—this brutal drop is starting to show certain signals. In the past, these signals have often foreshadowed an upcoming turning point in this sector’s market performance.

One of the most important signals is that the valuation premium of large-cap tech stocks versus the overall market has narrowed significantly. Historical experience shows that this kind of narrowing valuation premium (i.e., valuation compression) often lays the groundwork for the sector to subsequently outperform the broader market.

Since setting a historical high in October of last year, the Nasdaq 100 index has fallen 11%. Its forward 12-month price-to-earnings (P/E) ratio is currently 21x, only 1.7x higher than the S&P 500 index.

Data show that since the turn of the century and the bursting of the dot-com bubble, such a narrow valuation gap has appeared for only about a quarter of the time. When the valuation premium last fell to such a low level, the Nasdaq 100 index went on to post a historical high for the degree of outperformance versus the S&P 500 index over the following one year.

Of course, economic uncertainty brought by the Iran war could weaken many market signals that have previously proven effective. Whether this indicator remains valid is still subject to the test of time.

Big Tech’s sharp pullback

The Nasdaq 100 index entered a technical correction zone last Friday (defined as a decline of at least 10% from its recent high). This was the first such occurrence since April 2025—when U.S. President Donald Trump’s tariff policies pushed U.S. stocks to the brink of a bear market.

Even though it is extremely difficult to pinpoint market turning points precisely, historically, “oversold” conditions are often viewed as a more attractive entry opportunity. For example, in September 2013, when the Nasdaq 100 index’s valuation premium versus the S&P 500 index also fell to a low level, the index subsequently recorded its best relative performance versus the S&P 500 over the prior six quarters.

Tech stocks have remained under sustained pressure, mainly because concerns have been intensifying about whether the market’s massive investment in artificial intelligence (AI) will deliver returns. Meanwhile, the Iran war—recently escalating further—has dealt an additional blow to risk appetite.

Deutsche Bank data show that the technology sector’s relative performance has fallen to the bottom of its past decade’s trend channel. At the same time, investors’ positioning is clearly underweight, only at the 28th percentile of the historical average.

So-called “The Magnificent Seven”—NVIDIA, Microsoft, Apple, the Google parent company Alphabet, Amazon, Meta, and Tesla—are all down at least 10% from their respective historical highs.

Take NVIDIA as an example: since it set a closing record high in October of last year, NVIDIA’s share price has fallen nearly 20%. With the stock decline coinciding with upward revisions to earnings expectations, NVIDIA’s forward P/E ratio is currently about 19.6x, the lowest level since early 2019.

Investors typically use the P/E ratio to gauge a stock’s valuation relative to expected future earnings.

Notably, NVIDIA’s P/E ratio has fallen below roughly 20x of the S&P 500 index overall, which is fairly rare—because investors usually assign a higher valuation premium to high-growth companies.

Meanwhile, in the recent market correction, Microsoft’s P/E ratio has also dropped from 35x in August last year to around 20x, while AI rival Alphabet’s P/E ratio has fallen from nearly 30x at the start of this year to about 24x.

Wall Street starts buying the dip

Even so, Big Tech’s long-standing position as the market’s leading sector and an earnings engine has led Wall Street strategists to start paying attention to the continually accumulating “oversold” signals—and to view them as the most attractive investment direction right now.

Michael O’Rourke, chief market strategist at Jonestrading Institutional Services, said: “This round of adjustment in tech stocks is constructive and will create buying opportunities within the sector. Investors should use this phase to selectively buy shares of companies they are more confident in.”

Julian Emanuel, chief stock strategist and quant strategist at Evercore ISI, said: “We are buying large-cap tech stocks.” He believes that the AI revolution will accelerate in 2026, and he also points out that the Nasdaq 100’s price-to-earnings ratio relative to the S&P 500 is attractive.

“More importantly, the valuations of multiple tech stocks are already below the lows seen during the pandemic,” Emanuel said.

Several other Wall Street professionals are also looking for opportunities in tech stocks that may have been oversold, including Christopher Harvey of CIBC Capital Markets. The names he mentioned include Alphabet, Apple, NVIDIA, and Palantir, among others.

Ohsung Kwon of Wells Fargo Securities expects the Nasdaq 100 index and large-cap tech stocks to soon enter a period of outperforming the broader market.

Kevin Gordon, Head of Macro Research and Strategy at Charles Schwab, said: “The technology sector has experienced a more severe pullback than other industries, and recent capital allocation has been quite weak. This increases the probability of a rebound.”

But he also warned about the risk: “The issue is that the current optimistic earnings expectations haven’t yet fully priced in the disruptions that a prolonged war may bring.”

“In a more severe scenario, tech stocks may no longer have the same safe-haven attributes as in the past, and investors may shift toward more traditional defensive sectors,” Gordon added.

(CFIC Xia Junxiong)