Investors have witnessed a marked shift in market behaviour in recent weeks.
The once seemingly invincible Big Tech stocks have faced pressure, no longer reaching new all-time highs, even as the broader S&P500 index posted record highs earlier this week (Monday).
Nvidia—the poster child of the recent tech renaissance—has seen its stock price fall 8.5% from its August peak, despite reporting impressive second-quarter earnings on August 28th that surpassed expectations.
This decline has left some wondering if the era of Big Tech dominance is fading.
But a closer look reveals that this may simply be part of a well-worn market cycle, a phenomenon that has repeated over the years: the rotation from growth to value, and back again.
And just as in the past, history teaches us that two key factors suggest that Big Tech’s current slump may already be nearing its bottom, setting the stage for a resurgence.
For seasoned investors, the rotation from growth stocks to value stocks is not a new phenomenon.
What we’re seeing now, with investors gravitating towards dividend-paying, value-oriented stocks, reflects this recurring dynamic.
As interest rate cuts look set to continue to roll, it’s understandable why such a rotation might occur.
Value stocks, typically found in more stable sectors such as utilities or consumer staples, appeal to investors seeking income through dividends, especially in an environment where lower interest rates may compress yields in traditional fixed-income markets.
Yet, these rotations are typically often short-lived.
Over time, the market tends to revert back to growth stocks, particularly those at the forefront of innovation – which today for many means AI.
In this regard, it would be premature to assume that Big Tech is down for the count.
Instead, what we are likely witnessing is the natural ebb and flow of sector preferences—a cycle that has played out many times before.
One of the key drivers behind the eventual reversal from value back to growth is the combination of falling share prices and rising corporate earnings, which ultimately compress valuation multiples. T
Take for example, the price-to-earnings (P/E) ratio, a commonly used metric for valuing stocks. When share prices fall while earnings continue to grow, the forward P/E ratio declines, making these stocks more attractive to investors.
In the case of tech, the recent pullback has already begun to adjust these valuation metrics to more reasonable levels.
Companies like Nvidia, Microsoft, and Apple are still generating robust earnings, even if their stock prices have taken a hit. As a result, forward P/E ratios for these companies are gradually coming down, which could entice investors to re-enter the market once they perceive that tech stocks have become undervalued relative to their growth potential.
Moreover, the earnings outlook for Big Tech remains strong. Despite concerns over global economic growth, companies in this sector are well-positioned to weather economic headwinds.
Many of these firms have diversified revenue streams, solid cash reserves, and dominant market positions that enable them to maintain profitability even in challenging conditions.
As corporate earnings continue to rise, any further decline in share prices is likely to be short-lived, as valuation compression will eventually draw investors back to these growth giants.
The second theme that often drives a rotation back to growth stocks is a slowdown in global economic growth.
Over the past year, economic growth has indeed been tepid, with several indicators suggesting that a full recovery may still be a way off. This has been particularly detrimental to value-oriented cyclical stocks, whose performance is closely tied to the health of the broader economy.
For value stocks to perform well, they need a strong tailwind of economic expansion. In an environment where growth is subdued, these companies may struggle to deliver meaningful earnings growth, despite their current popularity among investors.
In contrast, Big Tech companies have demonstrated a remarkable ability to grow earnings even in periods of economic stagnation. Many of these firms are less reliant on the cyclical nature of the economy, as they benefit from structural trends such as the digital transformation, cloud computing, artificial intelligence, and e-commerce.
As economic growth continues to slow, the appeal of these long-term growth drivers becomes even more apparent.
Investors who have shifted to value stocks in search of stability may soon find themselves disappointed by the modest earnings growth in these sectors.
So, while Big Tech stocks have faced recent declines amid a shift toward value, the fundamentals of these companies remain compelling.
With valuation metrics adjusting and earnings growth outpacing economic headwinds, the current downturn is more likely a pause than a permanent retreat.
As market dynamics shift again, Big Tech’s innovation and resilience are poised to reassert their dominance, making this a moment of opportunity rather than concern for forward-looking investors.
Nigel Green is deVere CEO and Founder
Also published on Medium.
