Tech Is Getting Beat Up. But This Isn’t 2000 All Over Again.

Nvidia stock has pulled back in the past week but is still well above its 200-day moving average. Above, humanoid robots at Nvidia’s booth at a trade expo in Beijing last month. Photo: Jade Gao/AFP/Getty Images

The sharp pullback in Big Tech is enough to make you wince. Even if not much rattles you. And if you remember the dot-com bust 25 years ago, you might be tempted to say: “Here we go again.”

Well, don’t be tempted. Don’t even think it. This is a correction, not a tech wreck.

Yes, the Magnificent Seven— Alphabet, Apple, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla —plus Broadcom and Palantir have all had losses since the retreat started a week ago.

Palantir, for example, is down 14% and Broadcom is off 7.5%. Many of the Mag seven have dropped 3% to 4%. Meta has been hit even harder, falling 5.6%. Alphabet is down just 1.5%.

But a strong case can be made that this is a blip on the radar.

Let’s start with earnings growth. The S&P 500’s tech behemoths are expected to churn out robust numbers for the next five years.

Meta’s earnings, for example, should increase an average of 15% annually over the next few years if Wall Street estimates are right. And analysts are predicting long-term earnings growth for Broadcom and Palantir will top 20% annually.

UBS Investment Bank’s Sean Simonds thinks investors should stick with tech’s AI winners because their earnings beats have been fairly large. Meta’s second-quarter earnings came in 21% higher than expected, for example, while Microsoft’s profits topped forecasts by 8%.

And their earnings increases have outpaced the broader market by a lot. Simonds noted that tech earnings this year are up more than 25% from a year ago, compared with about 7% for the rest of the market.

Now, about those valuations. There has been a low whine about how pricey Big Tech tech are. But valuations are more reasonable now than they were in the late 1990s and they have also come down from their nosebleed peaks this year.

The Roundhill Magnificent Seven exchange-traded fund is now trading at 31 times earnings estimates, down from 41.5 in December shortly after the election. Contrast that with the forward price/earnings ratios of Oracle and Cisco from early 2000: a whopping 130 times and 150 times forecasts, respectively.

Of course, there are examples of froth now. Cue Sam Altman of OpenAI talking about a bubble. Palantir trades for more than 240 times earnings estimates. Credo Technology has a P/E ratio north of 65. But these look to be exceptions, not the rule.

“Bull markets driven by a new disruptive technology occasionally face challenges from growth scares, policy uncertainty, and valuation concerns, all of which investors are currently navigating,” wrote Jessica Rabe, co-founder of DataTrek Research.

“U. S. large cap tech stocks are still early in a secular bull run, driven by monetization opportunities around gen AI. There will be pullbacks, however, just like in every bull market,” she added in her Thursday note.

Rabe also pointed out that Nvidia is a clear leader in AI chips today, another key difference between now and the late 1990s.

Back then, investors were betting on a number of players—Amazon, Microsoft, Oracle, Cisco, Intel, and Dell—to be beneficiaries of the internet revolution.

The market’s perception of winners and losers in AI today is far more narrow. That’s encouraging.

And if earnings and valuations aren’t enough, let’s get technical. Many of Nasdaq’s momentum darlings, despite their losing streak, remain well above their 200-day moving averages, which suggests more upside is ahead.

Nvidia, for example, is trading around $175, more than 30% higher than its 200-day moving average of about $138. Meta, Tesla, and most of the others in the Mag Seven are still comfortably north of their 200-day moving averages, too. Apple is the laggard.

Yes, tech probably will remain volatile for the rest of the year. Yes, more pullback could be in the cards. But don’t expect another tech apocalypse like 2000.

Here’s how one Wall Streeter, Keith Lerner, put it:

“The recent setback in the tech sector is a necessary reset within a still-constructive long-term trend. The sector’s ‘rubber band’ was stretched…making it more vulnerable to negative headlines,” wrote Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services.

“The main risk to monitor is a deterioration in earnings
momentum—however, profit trends remain strong for now,” Lerner added in his Thursday report.

Nvidia should remind Wall Street of that Wednesday when it reports its latest results. The AI chip king is expected to post a year-over-year earnings increase of 50%. Profits are forecast to grow at a 25% clip over the next few years.

Now, that certainly doesn’t sound something to worry about.

Write to Paul R. La Monica at paul.lamonica@barrons.com