Join our community of smart investors

Tech sell-off could herald stock shuffle

Goldman Sachs analysts don't expect US momentum stocks to recover fully from recent losses, but slower-growing companies could gain.
April 17, 2014

As shares in global tech companies continue to tumble, investors may worry that other stocks could follow suit. But equity analysts at Goldman Sachs (US:GS), who charted the current drawdown in the US against 46 similar events since 1980, believe their fears are unfounded.

If the current slide follows the historical average, then US markets are now more than two-thirds through the decline, with 3 per cent further downside in the next three months. But that could mean some reshuffling - 'momentum' stocks, or the past year's best performers such as Facebook and Netflix, may fall out of the top ranks. Meanwhile, slower-growing stocks with lower valuations such as retailer Wal-Mart and confectioner J.M. Smucker may move up, in tandem with the broader stock market. In fact, America's S&P 500 index has historically risen by an average of 5 per cent in the six months after a sell-off, while momentum stocks declined a further 4 per cent.

The analysts also quashed comparisons of the ongoing slump to the dotcom crash, when the S&P 500 and tech-heavy Nasdaq indices lost over half of their value. Speculation seems less rampant today, with about half the number of US IPOs last quarter compared to the same period in 2000. The S&P 500 index also seems more balanced - technology accounted for a third of its equity cap, but only 14 per cent of its earnings in 2000, whereas today it makes up 19 per cent of both.