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Tuesday, May 25, 2021

It's been a three-month slog for tech stocks. It might not be over.

Two things can be true at the same time.

It is true that the Nasdaq is a mere 2% off its record high.

It is also true that the last three months have not been an easy time to be a tech investor.

The Nasdaq hit a record high of 14,095 on February 12. On April 26, the index hit a marginal record of 14,138. Between those two highs the Nasdaq fell about 10%. After the more recent high, the index fell almost 8%.

So while Monday's gain of more than 1.5% for the Nasdaq might reassure some investors, the macro drivers for the tech trade — which has led the market over the last decade — continue to be challenged. And the frustration for investors overweight these sectors might not be over yet.

"We don't think there's any problem with the fundamentals in the tech space," RBC strategist Lori Calvasina told Yahoo Finance Live on Monday. "But we think it's been an over-owned, over-valued part of the market and it's just the wrong macro backdrop for this part of the market at this moment in time."

The backdrop for the market right now, of course, is one where growth is accelerating and inflation is accelerating as the economy re-opens after a pandemic-induced shock.

And so sectors and investment styles that benefit more from GDP growth accelerating are in favor when compared to sectors and investment styles that can gain share in other environments.

Deutsche Bank strategists led by Parag Thatte published a note Friday that showed investors continuing to pour money into both equity and fixed income products that are perceived as inflation winners: TIPS, energy, materials, and financials.

Energy, materials, and financials are also well represented in cyclical trades, value trades, and re-opening plays. Commodity prices have soared. Infrastructure expectations are up. And more economic growth paired with higher rates feeds into the financial system.

And the money moving into this sector is coming from investors lightening up on their tech trades.

"We think inflationary pressures are here," Calvasina told Yahoo Finance on Monday. "And tech is one of the biggest sources of funding for rotation back into reflationary plays... So we think it's just not the right time yet to jump back into this space."

In a note published last week, Calvasina and her team "dig into the style rotation from a different angle by addressing the question of whether the pain in big Tech has fully played out. Our work suggests that it has not for a few reasons."