The Nasdaq 100 Index capped a third straight week of declines that has shaved off $1.6 trillion in market value from high-flying technology stocks amid a rise in U.S. Treasury yields.
The slump eased Friday as the benchmark rose alongside the S&P 500 Index, gaining 1.6%. Still, the Nasdaq ended the week 1.9% lower, marking the longest streak of declines since September.
“Higher interest rates make valuations tougher for technology stocks, but that’s OK because valuations have become excessive anyway,” said Matt Maley, chief strategist at Miller, Tabak + Co. “This correction will take some froth off of valuations. It was about time. They can’t go up and up and up forever.”
Despite the selloff, valuations for technology stocks are still hovering above average levels. The price to earnings ratio for the Nasdaq 100 is around 27 times, well above the five-year average of about 21. At its peak in 2020, it was 30 times.
A spike in U.S. Treasury yields and the prospect of higher inflation has unsettled the stock market and helped trigger a selloff in the index, which advanced nearly 50% in 2020.
For Randy Frederick, vice president of trading and derivatives for Charles Schwab, while growth prospects for tech stocks remain largely unchanged, a reckoning was long in the making.
“Tech has basically been the leading sector for a decade,” he said. “Without a doubt the sector looks inflated, and it had the most room to give up, especially now that people are concerned about inflation.”
BTIG Chief Equity and Derivatives Strategist Julian Emanuel said the slump in technology stocks in recent weeks is part of the transition to value from growth. He anticipates value will lead growth throughout 2021 and sees the Nasdaq 100 performing in line with or modestly trailing the market.