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Tech stock prices were ‘not real life’ — and the correction has only just started, expert says

  • This week kicked off with more bad news for tech stocks, dragging major U.S. indexes into correction territory that some experts predict is just the beginning of a longer downturn.
  • Tech is facing a mounting sell-off amid growing fears of regulation and companies hit by scandal, production problems, testing accidents and President Donald Trump's Twitter ire.
  • The S&P 500 and Nasdaq closed at their lowest levels in nearly two months Monday, with the S&P's tech sector down by 2.48 percent by the end of the trading day.
A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, June 29, 2017.
Michael Nagle | Bloomberg | Getty Images
A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, June 29, 2017.

This week kicked off with more bad news for tech stocks, dragging major U.S. indexes into correction territory and prompting one expert to compare them to a famed institution that has seen its own historic ups and downs.

"All these tech stocks in America or other parts of the world are a little bit like the British royal family," said David Marsh, managing director at think tank the Official Monetary and Financial Institutions Forum (OMFIF). "You put them on a pedestal one day and they're great … And you knock them off the next day."

Indeed, the last year saw tech stocks, in particular the FAANGs — Facebook, Amazon, Apple, Netflix and Google — hit record highs. Now, amid growing fears of regulation and a number of companies hit by scandal, production problems, testing accidents or President Donald Trump's Twitter ire, the much-vaunted sector is facing a mounting sell-off.

"It's quite clear that some of these tech stocks got to stratospheric levels not justified by real life," Marsh said. "And therefore whether it's Mr. Trump or worry about some vehicle going off the road and killing people, there are lots of very justifiable reasons I think to sell. I think the correction has only just started."

The S&P 500 and Nasdaq closed at their lowest levels in nearly two months Monday, while the Dow Jones was down 11 percent from its record highs. The S&P's tech sector was down by 2.48 percent by the end of the trading day.

Heated tweets from the U.S. president targeted Amazon this weekend and sent shares down sharply, sparking concern over what measures the government might take on taxes and regulation. But prices were bound to drop regardless, Marsh told CNBC Tuesday, because the sky-high valuations of the previous year were simply unsustainable — and there may be further corrections to come.

A rotation out of FAANGs?

Too much money has been herded into too few stocks, said Robin Griffiths, chief technical analyst at the at U.K.-based currency investment firm ECU Group, which means we're likely to see a rotation out of the tech sector as investors attempt to de-risk.

"All of the FAANG stocks had become too high by normal valuation standards," Griffiths said, describing the market as a "mania" that needed to be corrected.

Cheaper non-tech stocks, as well as assets beyond equities and outside of investors' home markets, will be the beneficiaries of this so-called rotation, Griffiths predicted.

Differentiating between tech stocks

But not all FAANGS are created equal, and while the tech sector may appear under siege, companies are certainly not all in the same boat.

"It's no longer a homogenous group," Griffiths said. He cited Facebook, which has been plagued by the Cambridge Analytica scandal involving misuse of private user data, as having uniquely dire problems.

Indeed, it has been a divergent year for tech stocks. Year-to-date, Netflix shares have grown by an eye-popping 46 percent, Amazon by 17 percent and Twitter by 16.7 percent. Meanwhile, Apple has dipped 1.5 percent since January 1 and Snap has come down 1.3 percent.

And investors are starting to discern between these different stocks — whether it's examining Tesla's production issues, the effect of a U.S.-China trade war on Apple, Netflix's user numbers, Snap's redesign popularity, regulation of social media companies, or the safety of driverless vehicle testing.

Richard Harris, chief executive at Port Shelter Investment Management, stressed the importance of this differentiation, suggesting that despite the current picture, stocks overall have further room to rally.

While there are concerns in the tech sector over whether some of these stocks have "gone too far," Harris told CNBC Tuesday, "the whole FAANG issue, I think, is being broken apart. I think Facebook looks vulnerable, I don't see many of the others looking as vulnerable."