The stock market managed to bounce off the lows of Monday’s session, but the fierce selloff that led to a 500-point plunge on the Dow DJIA, -0.86% early on provided another example of just how vulnerable investors are to global trade tensions and President Trump’s itchy Twitter finger.
“What the Goldilocks jobs report on Friday giveth, Twitter and trade taketh away,” DataTrek’s Nick Colas wrote in a note to clients. “There’s always one sector to watch for signs that the fear has hit a crescendo, and this time it is technology.”
Colas says it is the “fulcrum asset” from both a fundamental perspective and in terms of market valuations, which are clearly running high.
He pointed out that tech is one of the few S&P SPX, -0.97% sectors that derives more than half of its total revenue from overseas customers. In fact, at 58%, it’s the highest of any industry group.
“That makes it the poster child for international trade, and not just with China,” Colas wrote. “Markets were hoping that a calm resolution to US-China trade disputes would pave the way for other agreements.” So far, that’s not happening.
Tensions were ratcheted up again on Sunday when Trump warned in a tweet that the 10% tariffs on $200 billion worth of goods from China would be raised to 25% at the end of the week amid stalled trade talks. “U.S. large cap Tech is uniquely exposed to this narrative,” Colas explained. “And not in a good way, obviously.”
Sure enough, tech was one of the harder hit sectors during Monday’s volatile session. At last check, the tech-heavy Nasdaq COMP, -1.13% was down more than 1%, the hardest hit of the major U.S. indexes.
Colas noted that the “tech sector” in the S&P doesn’t include Facebook FB, -1.66% , Google GOOG, -0.51% and Amazon AMZN, -0.99% — all three were moved to other sectors to avoid the broad index’s tech dominance. That leaves Apple AAPL, -2.26% and Microsoft MSFT, -1.14% as the behemoths in the group, and both have relatively large direct exposure to China.
”At a 21.7% weighting in the S&P 500, Tech’s premium earnings multiple of 19.3x forward earnings was an outsized reason U.S. stocks sported a 16.8x earnings multiple on Friday evening,” Colas wrote in his note. “Where they settle out on Monday evening remains to be seen… ”
At last check, Apple shares were down almost 2% to $207.86, while Microsoft was off by less than 1% to $127.90.
“When tech bottoms, the market bottoms,” Colas said. “And not before.”
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