Was Friday’s Tech Sell-Off Justified?

Last week, Donald Trump threatened 10% tariffs on $300 billion in Chinese imports on September 1. This new round of tariffs is set to impact consumer electronic goods such as smartphones and laptops. The tariff war escalation sent the stock market tumbling on August 2, led by a tech sell-off.

The SPDR S&P 500 ETF fell 0.8%, while the tech-focused Invesco QQQ Trust ETF and the Technology Select Sector SPDR ETF (XLK) slipped 1.5% and 1.6% respectively. China’s JD.com (JD), Alibaba (BABA), Baidu (BIDU), and Sina (SINA) fell 2.1%, 2.8%, 1.3% and 0.2%. The tariff threat spooked markets.

Several data storage stocks also fell after NetApp’s discouraging forecast. NetApp stock lost over 20.0% on Friday after the company’s preliminary guidance was below analysts’ estimates. NetApp attributed this guidance to soft IT spending and a weak macroeconomy. Peers Dell Technologies (DELL), Pure Storage (PSTG), Splunk (SPLK), Hewlett Packard Enterprise (HPE), and Cisco (CSCO) fell 9.2%, 9.3%, 6.4%, 6.2%, and 4.0%, respectively, on Friday.

Was Friday’s Tech Sell-Off Justified?

Analysts warned of the slowdown in IT spending

Last month, AB Bernstein analyst Tony Sacconaghi warned investors to stay away from overvalued technology stocks. He predicted that these companies’ earnings growth could fall steeply. The analyst forecast tech sector sales growing just 0.5% in the upcoming quarters, far less than overall markets, which are anticipated to grow 4.7%.

Investment bank Goldman Sachs (GS) has also warned about the software sector’s high valuation. Though software stocks are somewhat insulated from the trade war, they were trading at a premium. FactSet believes that as economic growth slows, companies with higher international exposure will underperform broader markets. Technology stocks, with huge international exposure, could be volatile.

Last week, Arista Networks (ANET) announced its second-quarter results. Though the company easily beat Wall Street’s earnings and revenue estimates, it expects sluggish sales in this year’s second half. ANET stock was down 10.3% on August 2. Enterprise software company ServiceNow (NOW) also lost about 11.0% last week despite stellar quarterly results.

All eyes on Apple amid tech sell-off

While slowing tech spending is a concern, technology stocks are also the most vulnerable to increasing tariffs. Several companies have heavy exposure to China, and the new round of tariffs could impact their revenue and bottom line.

Apple (AAPL) stock was down over 2.0% on Friday, losing over $40 billion in market cap. Apple’s manufacturing costs are set to increase with the new round of tariffs. The company now has to decide whether it will bear these costs or pass them to consumers.

Apple products, priced at a premium, are out of reach for consumers in the most emerging markets. It could lose sales if it passes costs to consumers. Alternatively, absorbing the costs would hurt the company’s profit margin. Apple could consider moving its manufacturing to India or Vietnam.

Wedbush analyst Dan Ives has forecast Apple’s earnings falling 4.0% in fiscal 2020 if it absorbs the tariff costs. By transferring costs to consumers, it could reduce iPhone demand by 6 million–8 million devices in domestic markets. Apple stock has fallen about 5.0% in the last two trading sessions. Could Friday’s tech sell-off be the start of an extended bear run for tech stocks, or will they bounce back?