3 reasons why the correction in tech stocks has further to run, according to Morgan Stanley's top US equity strategist

3 reasons why the correction in tech stocks has further to run, according to Morgan Stanley's top US equity strategist
Bloomberg TV
  • The sell-off in technology stocks is likely not over, according to Mike Wilson, Morgan Stanley's chief US equity strategist.
  • In a note on Sunday, Wilson highlighted that the bull market in stocks will continue with value and cyclicals leading the way rather than the technology sector.
  • But technology stocks will continue to lag for three key reasons, according to Wilson.
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The swift decline in technology stocks over the past month likely has further room to the downside, Mike Wilson, Morgan Stanley's chief US equity strategist, said in a recent client note.

Since its peak on February 16, the Nasdaq 100 has declined by more than 10% even as a constant stream of good news hit investors. Vaccinations for COVID-19 continue to surge, daily COVID-19 cases have collapsed since the January peak, and Congress is on the verge of passing a $1.9 trillion stimulus package.

But with a full economic reopening within reach, coupled with a surge in interest rates, investors are rotating out of high growth tech stocks and into value and cyclical stocks that are poised to benefit from consumers finally being able to leave their homes and spend money following a year of rolling lockdowns.

The recent trend of high-growth technology stocks underperforming its value peers will likely continue as Wilson sees more downside in the technology sector for these three reasons, according to the note.

1. "Markets lead the Fed, not the other way around."


"The non-linear move in 10-year yields has awoken investors to a risk they thought was unlikely, if not impossible. The equity market now knows the 10-year yield is a 'fake' rate that either can't or won't be defended. To that end, the Fed did expand its balance sheet by $180 billion in February, 50% greater than its target. Yet, rates surged higher," Wilson said.

2. "The rotation might accelerate even further."

"There will be a big shift in the top and bottom quintiles of 12-month price momentum by the end of this month. Most of the stocks going into the top quintile are value and cyclical stocks. Conversely, many of the stocks moving out of the top quintile are tech and other high-growth stocks.

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"Part of the rotation from growth to value has been due to better relative fundamentals, as the economy recovers, and cheaper valuations. However, as these value stocks move into the top quintile of price momentum and growth stocks move out, the rotation might accelerate even further. This could be quite disruptive to portfolios and lead to another round of deleveraging like in January."


3. "The Nasdaq 100 should test its 200-day moving average."

"Based on the technical damage to date, the Nasdaq 100 appears to have completed a head and shoulders top and should test its 200-day moving average," Wilson said.

The 200-day moving average of the Nasdaq 100 currently sits at 11,635, representing potential downside of 10% from Friday's close.

A head-and-shoulders pattern is a bearish topping pattern that often signals a reversal following a bullish trend. The pattern takes its shape from a series of three tops, with the second top being the highest of the three. A neckline represents support and is formed by connecting the bottoms associated with the peaks. When the stock breaks below its neckline, a sell signal is triggered for traders.

3 reasons why the correction in tech stocks has further to run, according to Morgan Stanley's top US equity strategist