US Technology Stocks, Have They Bottomed Out?

According to Zhitong Finance APP, China Securities JianTou Securities released a research report stating that a key feature of the recent decline in the U.S. stock market is that technology stocks have been the main driver of the adjustment. The S&P 500 began to fall after reaching a record high of 7,000 points at the end of January this year, while the Nasdaq index started its downward trend earlier, retreating from its peak of 24,000 points at the end of October last year, hitting a low of 20,690 points, with a maximum decline of nearly 14%. After this round of adjustment, with compressed valuations and upward revisions in earnings, U.S. tech stocks are likely to form a bottom, making the current moment a buying opportunity. In the baseline scenario, even if valuations cannot expand due to AI-related concerns, improved profitability can still provide room for growth. In an optimistic scenario, a ‘Davis Double Play’ may unfold. In a pessimistic scenario, a second downturn caused by U.S.-Iran tensions would still leave tech stocks with relatively strong performance.

CITIC Securities’ main viewpoints are as follows:

Event: Following a significant pullback from historical highs, the U.S. technology sector has shown some signs of stabilization, coupled with the start of negotiations between the U.S. and Iran. Is this a good time to re-enter technology stocks?

Brief commentary:

An important characteristic of the recent decline in the U.S. stock market is that technology stocks have been the main driver of the adjustment.

The S&P 500 began to fall after reaching a record high of 7,000 points at the end of January this year, while the Nasdaq index started its downward trend earlier, retreating from its peak of 24,000 points at the end of October last year, hitting a low of 20,690 points, with a maximum decline of nearly 14%.

Despite facing numerous short-term challenges, it remains difficult to be bearish on technology stocks in the medium to long term. So, does the current U.S. tech sector present a buying opportunity?

The institution believes that after recent adjustments, U.S. tech stocks are likely within a bottom range and can be acquired opportunistically:

First, valuation pressures in U.S. tech stocks have largely eased, with upward revisions in earnings and sound fundamentals;

Second, in the baseline scenario, even if valuations cannot expand again due to various AI-related concerns, improvements in profitability can still provide room for growth;

Third, in an optimistic scenario, the possibility of a ‘Davis Double Play’ cannot be ruled out;

Fourth, in a pessimistic scenario, if macroeconomic shocks lead to a second downturn, tech stocks will still offer relative returns and provide some degree of risk hedging.

Consider the following logic:

(1) The valuation of technology stocks has significantly contracted, reaching its lowest level in nearly six years. Moreover, the premium relative to the broader market has started to approach zero, marking the lowest level since 2017.

The valuation of the S&P 500 Information Technology sector has declined from its peak of approximately 30.5 times to a low of 19 times, essentially returning to pre-pandemic levels.

More critically, the premium of the technology sector’s valuation over the broader U.S. stock market has dropped to around 5%, the lowest since 2017. If the market continues to recover, the premium of the technology sector may rebound.

(2) Within the technology sector, the compression in valuation is broad-based rather than driven solely by software stocks.

The earlier advancements in AI had a significant negative impact on the valuations of software companies. However, data shows that since the second half of last year, the maximum decline in the software industry’s valuation was 40%, while for the overall technology sector it was 36%, with no significant disparity. This indicates that the potential for valuation recovery is widespread across many sub-sectors of technology (all generally safe), and not solely driven by software stocks.

(3) Profit expectations for technology stocks remain strong, with continuous upward revisions since the beginning of the year, showing a clear relative advantage; this indirectly reflects that skepticism towards AI risks is still primarily concentrated at the valuation level.

Since the beginning of the year, profit expectations for the technology sector in 2026 have been revised upwards by more than 10%, while cyclical sectors such as consumer goods, real estate, and industrials have seen noticeable downward revisions. Currently, the 10-year percentile of the technology sector’s valuation is below 50%, higher only than the real estate sector, while its profit growth significantly outpaces other sectors.

After the disappearance of the valuation premium, the robustness advantage of its profitability re-emerges, offering a high cost-performance ratio.

The stability of profit expectations also indirectly reflects that the recent adjustments in technology stocks are mainly about digesting valuations, driven by concerns such as AI capital expenditure, while the market does not currently harbor systemic worries about the short-term operations of the industry.

(4) The sentiment surrounding negative narratives on AI has somewhat faded. Since the U.S.-Iran conflict, technology stocks have demonstrated their safe-haven attributes and regained favor.

The negative narrative surrounding AI has been continuously reinforced. Since the fourth quarter of last year, the Nasdaq began to consistently underperform the broader market, indirectly reflecting market skepticism. However, after the deterioration of the Middle East situation, investment focus shifted back to technology leadership, with a marginal improvement in market sentiment.

(5) The overall downside risk for U.S. equities remains manageable, providing support for technology: First, the critical 10% retracement level has held; second, the pressure from overextended cyclical gains has been partially released.

In addition to doubts about AI, the two other risks faced by U.S. equities in the first quarter stem from systemic geopolitical risks and structural risks arising from the discrediting of recovery trades. For now, both appear relatively safe, and as long as the overall U.S. equity market does not experience a major downturn, it will help support a rebound in technology stocks.

First, following the U.S.-Iran conflict, the maximum drawdown of the S&P 500 from its historical high was around 10%, while the Nasdaq saw a decline of approximately 15%. This is consistent with the typical annual 10% retracement seen in U.S. equities and does not indicate a severe systemic risk. In contrast, previous shocks such as tariff impacts last year or interest rate hikes in 2022 led to S&P 500 declines exceeding 20% (typically occurring once every three years). As long as tensions do not escalate significantly, the S&P 500 may retest the 10% decline level (a secondary bottom), but there will be underlying support.

Second, from the end of last year to the beginning of this year, recovery trades became the dominant narrative, driven by expectations of policy effects such as interest rate cuts and tax reductions. Cyclical sectors surged on improved earnings forecasts. CITIC Securities had previously expressed concerns that the U.S. economic foundation was unstable, and once recovery expectations were disproven, related sectors could face adjustment risks. Currently, the U.S.-Iran conflict has helped deflate these expectations, with significant downward revisions to earnings forecasts for sectors like industrials, consumer goods, and real estate in the first quarter, achieving some pressure relief.

(6) Expectations for interest rate cuts return in the second half of the year, providing macro-level support for tech stocks.

Maintaining an optimistic outlook on interest rate cuts for the entire year, the decline in interest rates generally benefits the technology narrative.

Risk Warning: Unexpected upside in U.S. inflation or stronger-than-expected U.S. economic growth could lead to continued tightening of the Federal Reserve’s monetary policy, significant dollar appreciation, rising U.S. Treasury yields, further declines in U.S. equities, potential commercial bank bankruptcies, and currency and debt crises in emerging markets. A sharper-than-expected U.S. economic recession could trigger liquidity crises in financial markets, forcing the Federal Reserve to pivot toward easing. An unexpected escalation of Europe’s energy crisis could push the Eurozone into a deep recession, causing turmoil in global markets, shrinking external demand, and creating policy dilemmas. Escalating global geopolitical risks, a worsening of U.S.-China relations beyond expectations, uncontrollable factors in commodities and transportation, further deglobalization, ongoing disruptions in supply chains, and intensified competition for related resources are also possible scenarios.