Nasdaq, tech stocks could fail to meaningfully rally for years

By Senad Karaahmetovic

Tech stocks are still expensive despite a 2022 bloodbath, says Bernstein analysts.

As a whole, the tech sector fell approximately 34% in 2022 – the largest annual drop since 2008. The analysts note that tech’s 2022 relative performance was the poorest since the unwinding of the tech bubble in 2002.

Despite a large selloff, tech remains expensive as it trades at a 27% premium relative to the market, they add. Although the premium has contracted by 2500 basis points from its peak of 52% in November 2021, it is still above its historical average of 25%.

“We recommend a market weight in tech to begin 2023. On one hand, tech’s valuations remain near 20-year highs, tech’s growth is forecast to be slower than the broader market in 2023, and tech’s 5-year revenue growth expectations on a cap weighted basis are not higher than the broader market. That said, the tech sector ranks highest on quality and ROIC, is not crowded vs history, and earnings expectations for 2023 have declined more than for the broader market,” the analysts wrote in a client note.

Given still high valuations, the analysts see “some risk that tech could have a muted multi-year period of performance,” mostly due growth rates for FAAMG (Facebook (NASDAQ:), Amazon (NASDAQ:), Apple (NASDAQ:), Microsoft (NASDAQ:), and Google (NASDAQ:)) stocks. As of December 30, 2022, FAAMG stocks made up 35.7% of the Index (IXIC).

All-in-all, the analysts reiterated their previous stance that investors should take a selective approach when buying tech, focusing on high-quality, beaten-down growth names.