The bubble has burst, investors will return to technology stocks!

The stock market has experienced a period of volatility recently. On Monday, global stock markets saw a massive sell-off, with the S&P 500 index falling by 3%, marking its worst day since September 2022. However, by Thursday, the S&P 500 index recorded its largest gain since November 2022.

Most of the volatility was caused by drastic movements in large-cap tech stocks, leading some traders to question the valuation of AI-related stocks.

A team led by Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services, had previously downgraded the technology sector's rating at the end of June, "because our analysis showed that the industry had moved too fast in the short term."

At that time, Lerner pointed out that tech stocks had just posted their best monthly performance since 2002. In a new report released later on Thursday, he stated, "The rubber band has been stretched too tight, making the sector vulnerable to any bad news in the short term."

As a result, with earnings reports released and high expectations for positive surprises, the sector experienced significant outflows of funds.

However, Truist has now upgraded the rating of the technology sector to overweight and provided reasons for doing so.

Compared to the performance of the S&P 500 index, the technology sector has had its worst month since 2002. As shown in the chart below, such extreme performance in such a short period of time is rare, indicating market volatility.

The tech sector's performance in one month has gone from the best in 20 years to the worst in 20 years

From the mid-July peak, the technology sector has fallen by about 12%, with the semiconductor industry dropping nearly 20%. Lerner believes that "it appears that most of the excessive gains have been digested, and investors' expectations have been lowered."

The key point is that during this pullback, the future earnings expectations for the technology sector are still rising, reaching historical highs. Lerner said, "This indicates that the recent retreat is more due to market overcrowding rather than fundamental changes."

Furthermore, from a technical perspective, tech stocks are now in a "moderately" oversold condition. According to Lerner's data, the proportion of stocks above the 50-day moving average in the sector has dropped from 95% in mid-July to only 22% currently.

He said, "This indicates indiscriminate selling of tech stocks in the market." But he also warned, "Fairly speaking, the sector has entered deeper oversold territory. This situation is likely to occur again, meaning the pullback may not be fully over yet."

Lerner believes that the risk-return ratio of tech stocks has improved, especially as the positive long-term narrative about artificial intelligence remains valid Lena concluded: "In addition, in the context of economic cooling, given some long-term benefits brought by artificial intelligence and its growth prospects, we expect investors to return to technology stocks."