How to get to the bottom of the Nasdaq sell-off

Oct 27
The nature of tech equities has changed, and investors are once again worrying about less lofty issues like when sales may halt rather than waking up to visions of artificial intelligence utopia.

With the Nasdaq 100 down 11% from its peak in July, nearly one-third of its AI-driven gains have already been relinquished, following a difficult two days that have already cost investors almost $800 billion in lost market value.


Since the Treasury's volatility is still too high to declare a bottom with confidence and the price-to-earnings ratio has the potential to tighten, more problems are probably ahead.

Naturally, nobody knows how it will conclude or even if it has already done so. The projections are based on value comparisons, technical analysis, and the number of hits that the AI oligarchy, which has driven the climb, is expected to receive.

Estimates haven't proven a very good way to time the market when it's going up, but in times of reversal, they can serve as sentiment thresholds as traders watch potential entry spots.

Over the last ten years, the Nasdaq 100 has typically had a 30% valuation premium over the S&P 500. According to Wells Fargo Investment Institute senior global market strategist Samir Samana, a decline below 12,500—a level last seen in March—would be necessary to bring the market back to equilibrium, all other things being equal.

"Considering some of the themes that the index is benefiting from, this is probably where long-term investors will start to kick the tires," Samana stated. "It remains to be seen if interest rates will rise or remain at their current level of 5%. How much does the recession impact these growing companies' earnings per share, and is there one?

Kevin Gordon, senior investment strategist at Charles Schwab, claims that the current sell-off was inevitable given the difference between the valuations of the seven largest technology companies and the average S&P 500 stock. He predicts that major tech businesses will continue to lose money while the rest of the industry catches up.

In three months, the price-to-earnings ratio of the Nasdaq 100 dropped from 35 to slightly under 30, but the index still has more room to go toward its historical averages, he added. The major drivers of this will probably be several compressions and lower profit estimate revisions.

Rising interest rates and heightened capital market competitiveness may accelerate and deepen the sell-off. Right now, the yield on the 10-year Treasury bond is about the same as the S&P 500 index.

Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, believes that the selloff that started this week may easily result in another 10% decline for the Nasdaq 100.

The tech index began the week trading at 14,600, and a decline toward 13,000 is probably in store, maybe even by early November if Apple Inc.'s earnings disappoint. On Thursday, the index closed at 14,110.

According to statistics provided by Ned Davis Research, the average price-earnings ratio of eight significant technological companies is 35.4, which is higher than its long-term average of 28. These businesses include Apple Inc., Amazon.com Inc., Alphabet Inc., Tesla Inc., Nvidia Corp., Microsoft Corp., and Netflix Inc.

The equilibrium version of the Nasdaq 100 index is up 11%, but the capitalization-weighted index is still up 29% over the previous year.

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