Deutsche Bank becomes positive about tech stocks after price decline

Deutsche Bank expects major US technology stocks to recover from their recent price declines. The German investment bank was previously still cautious about the sector, but now sees sufficient reasons to become more positive again.

In particular, the combination of lower share prices, strong corporate profits and a historic pattern of strong recovery gives analysts confidence.

Deutsche Bank has raised its advice for major US technology stocks from neutral to considered. This means that the bank advises investors to invest relatively more in this sector. The change in course is striking, because the analysts had only issued their earlier neutral advice three weeks ago.

According to strategists Parag Thatte, Binky Chadha and Karthik Prabhu, technology stocks have lagged significantly behind the rest of the US stock market in a short period of time. The sector lost about eleven percent, while the other companies within the S&P 500 rose about six percent on average. This resulted in a difference of about sixteen percent in performance, as calculated by the bank.

It is precisely this sharp decline that makes the sector interesting again, according to Deutsche Bank. Analysts point out that technology stocks were five times more likely to fall back to the bottom of their rising long-term trend over the past 30 months. In those cases, a strong recovery followed, with shares rising by an average of 32 percent and outperforming the broader market by about thirty percent.

That historical pattern offers no guarantee that prices will rise as sharply again. Nevertheless, Deutsche Bank sees the recent wave of sales as a potential opportunity for investors who were previously put off by the high valuations of technology companies.

In addition to the price declines, the behaviour of investors also plays an important role. According to Deutsche Bank, investors were previously relatively heavily invested in technology stocks, but that position has now been reduced to a neutral level. As a result, some of the risk that arises when many investors own the same shares at the same time has disappeared.

The bank finds the difference between investors' expectations and the actual business results particularly striking. According to the analysts, the current market positioning would fit in with a profit growth of about ten percent for technology companies. However, in the third quarter, the sector's profits grew by 47 percent.

The results were also strong for the broader US equity market. Total earnings growth of companies within the S&P 500 was approximately 31 percent in the third quarter. Technology companies accounted for some 75 percent of that growth, while the average company's profit within the index increased by fourteen percent.

According to Deutsche Bank, this shows how important the technology sector remains for the US stock market. Although stock prices have fallen sharply, the underlying business results are still strong for the time being. That difference is an important part of the bank's optimism.

The more positive advice does not mean that Deutsche Bank considers all risks gone. An important point of attention is American politics. According to the bank, if the Democrats get their hands on both the House of Representatives and the Senate in the midterm elections, this could increase concerns about stricter regulations for large technology companies.

In addition, the geopolitical situation remains a source of uncertainty. Deutsche Bank estimates that the oil price is about 65 percent above the level that the bank considers reasonable based on fundamental factors. According to the analysts, this difference mainly reflects the additional risk premium that investors pay due to international tensions.

The bank points out that previous geopolitical shocks have led to even greater price declines in the stock market. The strategists refer, among other things, to the unrest surrounding the US import tariffs on ‘Liberation Day’ and the crisis around Iran. Such events show that unexpected political developments can quickly change stock market sentiment, even when corporate profits remain strong.