Fidelity: Tech Valuations May Already Price In Spending Slowdown

Fidelity's Denise Chisholm argues that technology stocks are positioned for further gains because their recent valuation reset likely already reflects concerns about slowing capital expenditure. Speaking with Ed Ludlow on "Bloomberg Tech," Chisholm noted that the sector has experienced a rare 30% multiple contraction, a move that has occurred less than 5% of the time since 1990. This compression has left technology stocks trading at only a 10% premium to the S&P 500, placing them in the bottom quartile of their historical range since the 1960s.

Chisholm explained that such significant multiple corrections skew the risk-reward profile in favor of outperformance. Historical data indicates that 77% of the time, earnings continue to grow after a multiple correction of this magnitude. Even in scenarios where earnings decline, the odds of outperformance remain strong within the 70th percentile range. She suggested that market fears regarding AI spending, return on investment, and persistent declines in free cash flow may already be priced into current stock valuations.

The discussion referenced a Z-score table analyzing forward price-earnings ratios for main S&P 500 sectors using weekly data with a five-year lookback. The data showed technology had the largest de-rating relative to its five-year norm. Chisholm emphasized that this valuation adjustment occurred ahead of earnings, which she described as having strong fundamentals. She stated that the market often prices in bad news early, meaning that by the time data confirms a slowdown, the stocks may have already discounted it.

Government data on technology capital expenditure, including data center spending tracked back to 2020, shows a second-derivative slowdown. This trend was visible in June GDP data and is expected to continue. Chisholm noted that historical slowdowns in tech capital expenditure rarely end in a contraction. Because tech spending has been a secular trend, rising from 3% of GDP in the 1960s to over 7% today, the base for growth remains high. Only four contractions have occurred historically: the financial crisis, the dotcom bubble, and two recessions in the 1970s.

Chisholm distinguished tech capital expenditure from residential investment, which was a factor in the financial crisis. She argued that when tech spending slows, GDP growth for other sectors often accelerates. This pattern suggests that capital expenditure is frequently a leading indicator for the broader US economy rather than just a sign of dependency. She concluded that technology appears more likely to lead market gains given its valuation data and consistent earnings history, allowing the sector to continue "climbing the wall of worry".