Sell-off in technology stocks might have some room for continuation

The set-back of technology stocks in the last two days has been triggered by statements from various asset managers that after the good run of the IT stocks (YTD +18%) it’s time to rotate some IT assets into more defensive value driven sectors (Healthcare, Energy etc.). The set-back is not driven by any company specific news flow which points to weakening fundamentals. Nevertheless, we believe that there is further room for a continuation of the correction as 1) the strong YTD performance is mainly based on multiple expansion which in some cases led to historic high valuations (we highlighted this when we dropped Apple (AAPL US, BUY) from our most favored IT list 5 weeks ago and when we downgraded Nvidia (NVDA US) recently to HOLD. Both are examples where we saw that share prices had been run too fast too far and where temporary profit taking was recommended although the long term investment case remains still very strong). 2) there is a rising concern in the market that the semiconductor sector might see a cyclical peak in Q3/Q4 and that in some areas rising inventory levels and double ordering could start to flag a peak in volumes in the near future. While we so far have no evidence of this issue, we also can say that after a meeting with the CFO of Infineon (IFX GR, BUY) who highlighted the cyclicality of the business several times we are becoming slightly more cautious on semiconductors (strategists downgraded the sector to underweight yesterday). 3) The big internet platform stocks reached new all-time highs and psychological levels (Amazon (AMZN US, BUY) and Alphabet (GOOGL US, BUY) both above USD 1000) which might have triggered profit taking as well. As we expect a continuation of the draw down (rotation into other sectors in the past has triggered a 10–20% set-back), we drop Apple from the US Top Pick list and Infineon from the EMU Top Pick list. We however would like to highlight here as well that we see this more as a technical set-back than as a fundamentally driven one.