Wednesday, February 28, 2024

Nasdaq Enters Correction Territory — What Investors Should Watch For Now

HomeStock-MarketNasdaq Enters Correction Territory — What Investors Should Watch For Now

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The tech-heavy Nasdaq index officially entered correction territory last week, dropping over 10% from its recent peak. This marks the 70th correction in the index’s history as investors grow concerned over rising rates, geopolitical tensions, and mixed earnings from Big Tech giants. While the market remains volatile, experts advise keeping perspective and focusing on quality names over knee-jerk reactions.

The Nasdaq has plunged around 23% year-to-date, with mega-cap tech stocks taking a hit. Last week’s disappointing earnings reports from the likes of Amazon, Meta, Alphabet and Tesla rattled investors already on edge given the challenging macro environment. But analysts say long-term investors should tune out short-term noise and stick to sound companies.

Big Tech Earnings Prove Double-Edged Sword

The third quarter earnings rush from tech titans proved a mixed bag, reflecting the tricky terrain companies now navigate. While beats on revenue and EPS dominated, weak future guidance and cloud growth concerns dragged stocks down.

Amazon and Alphabet missed on cloud revenue growth despite overall beats. Meta topped estimates but issued cautious Q4 outlook citing “macroeconomic uncertainty.” Tesla badly undershot Wall Street projections. Meanwhile Apple and Microsoft earnings are still ahead next week.

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The results reinforce a recalibration of sky-high expectations Silicon Valley giants face. Their AI potential remains alluring but monetization challenges persist while consumers tighten budgets amid high inflation and rates.

This perfect storm has driven the Nasdaq into its latest correction, as soaring tech valuations get re-evaluated against a darker backdrop. The downturn recalls prior plunges during recessions and the dot-com crash.

Advice For Long-Term Investors — Focus on Quality

Despite the gloomy market, analysts urge long-term investors to keep sight of the horizon and buy quality names on sale. While near-term turbulence rages on, the future drivers of growth remain.

“Long-term investors shouldn’t pay much attention to these kinds of moves,” says Will Rhind, CEO of GraniteShares. “Interest rates are most likely at the top of the cycle, and the economy is still in pretty good shape.”

Rhind advises focusing on “quality companies demonstrating growth and sustainability in earnings” during volatile times. For instance, Amazon and Microsoft stock are still up 50% and 40% respectively in 2022, outperforming the market.

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Ivana Delevska, Spear Invest Founder & CIO, agrees long-term conviction in sound companies will pay off over time. “There’s a reason why we prefer broad market rallies to narrow ones,” she notes.

Near-Term Caution Advised Amid Margin Calls

However, the short-term ride may remain bumpy, especially for those employing leverage. Delevska warns massive stocks plunging can trigger “vicious deleveraging cycles” forcing traders to dump shares to cover margin loans.

This may mean dumping quality names like Google alongside speculative stocks, so discretion is key. “Not all moves are equal,” says Delevska, noting strong firms unfairly sink in broad sell-offs.

Interactive Brokers strategist Steve Sosnick also cautions about money rapidly exiting both leading tech stocks and the overall market. Investors should watch for signs of rotation into depressed sectors as a signal of sentiment shifting.

For now, traders should remain nimble amid volatility while value-focused long-term investors can capitalize on discounted prices of resilient tech companies.

Cloud Growth Slowdown Contributing to Skittish Sentiment

One weak spot hurting tech stocks is slower growth in once red-hot cloud services. Amazon, Alphabet, and Microsoft all missed projections to varying degrees last week, fueling uncertainty.

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This mirrors a wider industry trend of enterprise cloud adoption maturing. But spending isn’t disappearing, rather becoming sustainable as corporations integrate cloud firmly into budgets.

The cloud remains integral to Big Tech’s future, even if growth normalizes post-pandemic. Patience is warranted given the total addressable market still projected to double by 2027, topping $1.5 trillion.

Meanwhile, tech giants are exploring ways to further monetize cloud and AI. For Amazon, advertising and optimizing AWS are priorities. The long-game for many players is ramping up capabilities before cashing in down the line.

In the big picture, the innovative infrastructure underpinning tech’s future persists through market cycles. Maintaining focus as the noise clears can prove rewarding for composed investors.

Of course, near-term uncertainty abounds. We will continue monitoring the Nasdaq correction and technology earnings closely. Stay tuned for further analysis on our Markets section as we track whether stocks have bottomed or more volatility lies ahead. In these turbulent times, keeping perspective remains crucial when eyeing opportunities.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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