U.S. tech stocks entered correction territory last week, with the tech-heavy NASDAQ Composite down 10.4% for the year at the lows. Although the index recovered some of the lost ground on Friday, it remained down 8% for the year at the day’s close.
Which brings us to today. Many investors, accustomed to high returns due to the unusually frothy nature of the equity markets from 2010 to 2024, don’t know what to make of the newfound weakness. The prior 14 years were an extended bull market whose two major interruptions (in 2020 and 2022) were short lived. Many investors apparently forgot what volatility feels like!
While it’s tempting to say “just hold the line and buy more,” history argues that the U.S. equity markets are in for more turbulence. The tech sector, in particular, was at its priciest since the 2000 dotcom bubble when the year began. Fortunately, many international markets actually look quite attractive. In this article, I will share what I think is next for U.S. tech stocks in the coming months.
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Continued weakness
History argues that the U.S. equity markets, especially tech stocks, will continue delivering a weak performance from here. The reasons have nothing to do with Trump’s capricious trade policies, but rather the simple fact that U.S. stocks had hit unprecedented valuations before the start of this year. Although Donald Trump certainly isn’t helping matters, the fact is that U.S. stocks were at their second highest all time Shiller P/E ratio (price/normalized inflation adjusted earnings) at the start of the year.
Stocks in the U.S. tech subsector meanwhile were at their second highest ever P/E ratio (the highest being that at the peak of the dotcom bubble). So we were at historically high valuations when the year began. What tends to happen in such situations is that stock prices decline. So, if history is a guide, then we are in for continued weakness – either negative returns, sideways returns, or low positive returns.
To take a few historical examples of when U.S. stocks got about as pricey as they’d been at the start of this year:
- 1. 2000. The NASDAQ ultimately went down 89% and took 15 years to fully recover.
- 2. Late 2022. The NASDAQ went down 35% and took about a year to fully recover.
The historical scenarios above are quite different from one another. But they both involved tech stocks at very high multiples followed by steep corrections. So, history argues that continued weakness in U.S. tech stocks should be expected.
What to do instead
If you’re concerned about the steep valuations of U.S. tech stocks, you could consider Canadian stocks as an alternative.
Consider Alimentation Couche-Tard Inc (TSX:ATD) for example. It is a Canadian gas station company that has many qualities arguing that it is better positioned than U.S. tech stocks are today.
For one thing, ATD stock is cheaper than U.S. tech stocks are, trading at 16.6 times forward earnings and 3 times book.
Second, it is quite profitable, with a 17% gross margin and 20% return on equity.
Third and finally, Alimentation has a strong balance sheet, with a sensible level of debt for all the M&A activity it has undertaken over the last decade. Overall, it is a viable alternative to pricey tech stocks.
