by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
The market’s recent slide has been fast – mainly driven by valuation compression, especially in technology stocks. Meaning, while earnings estimates haven’t really come down, price has. Tech’s forward P/E percentile rankings have fallen from persistent top quartile levels over the last two years all the way down to median. It’s the first time in over five years that tech valuations have been this “normal”. That’s important.
While rich valuations don’t guarantee underperformance, they do put the onus on fundamentals to deliver. Historically, the tech sector has often outperformed from expensive levels as long as margins are rising. And that’s exactly what’s we’ve seen – until now. But high valuations aren’t the problem they once were— we’re back into the middle quintile of relative valuation. Historically that’s where the tech sector has posted its best average relative returns – about 500bps above the market.
But if tariffs prove to be a durable cost shock, numbers may likely come down. And while we haven’t seen that (in size) yet, it’s important to remember that stocks often bottom well before fundamentals do. The goal is to find sectors that have a historical tendency of pricing in the damage early. Tech fits that bill. Historically, once tech hits this valuation zone and has already underperformed, the odds of historical outperformance are strong regardless of whether margins improve or deteriorate. In other words, some or all the earnings hit still to come, may be priced in.
One final point: Tech’s forward valuation is now identical to the consumer staples sector. That’s despite tech delivering consistently higher ROEs over the last six years. Yes, tariffs might make it different this time – but it also might be an opportunity to look at high quality companies at better prices.
Now, on to Bitcoin. What’s Bitcoin’s recent bounce really telling us?
Bitcoin’s recent pop – up nearly 20% in the last month – is catching attention. And while bitcoin is volatile enough to make anyone cautious about drawing conclusions, sharp reversals often make investors ask the bigger questions: is this about inflation? The Fed? The Dollar? Gold? Or something bigger? As tempting as the existential interpretations are, we can learn a lot from recent history.
Over the last three years, the 6-month moves in bitcoin have had much stronger correlations with equities than with bonds, gold, or the dollar. So, while we can’t rule out bigger macro narratives, the data suggests bitcoin’s behavior has consistently been tied to risk appetite in the stock market. That makes this move more than just noise – it may be a flag for a shift in risk sentiment.
Dig deeper, and there’s another layer. Since at least 2014, bitcoin has been deeply negatively correlated with the relative performance of classic defensive sectors like Consumer Staples and Utilities. That negative correlation is now the strongest it’s ever been. Given the recent defensive rotation has already gone two-thirds of the way through what a typical recessionary move looks like, bitcoin’s bounce is a reason to stay open to an alternative outcome. In other words, maybe the flight to defense is ending. And if so – what sector might benefit most? Here, bitcoin’s signal gets even more interesting.
Its recent move has a track record of leading technology stocks. If bitcoin simply holds where it is, the three-month change will soon rank in the top quartile of moves over the past three years. And historically, when that’s happened, tech stocks have gone on to outperform the market (on average) over the following six months. It’s another datapoint confirming what I wrote at the start of this newsletter: tech has quietly returned to a more attractive valuation zone; one we haven’t seen in over five years. Add bitcoin’s move to the growing list of signals suggesting tech’s risk/reward profile is shifting – quietly but materially – in investors favor. Like Ferris said, life moves pretty fast. Bitcoin might be telling you tech might, too.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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