Tech stocks have made big V-shaped rebounds five times in 30 months - and now Deutsche Bank forecasts another bounce

By Jules Rimmer

Big Tech just lagged the S&P 500 by 16%. Why one Wall Street team says a huge rebound is near.

Tech stock positioning has swung wildly from the top to the bottom of its long-run channel in just three weeks

After a harrowing October for the tech sector, the risk-reward profile is now swinging back in its favor.

Having downgraded the sector to neutral only three weeks ago, Deutsche Bank strategists have now reversed that call and are recommending investors overweight it once more. They base their bullish call on three Ps: positioning, performance and the perception of earnings growth.

The note was published Friday by strategists Parag Thatte, Binky Chadha and Karthik Prabhu and argued, "the spring is coiled again." In terms of performance, the correction in the mega-cap growth cohort has been emphatic. It has underperformed the S&P 500 SPX benchmark by around 16% with an 11% drop versus an almost 6% gain for the rest of the index.

The sector now languishes at the bottom of its long-run trend channel, a level from which, Deutsche Bank points out, it has made a V-shaped rebound five times in the last 30 months.

In just three short weeks tech stocks have gone from one extreme to another

While acknowledging previous shocks like Liberation Day and the start of the Iranian crisis saw the sector go lower still, the risk-reward profile now favors an overweight call, says the team.

Previous rebounds have been powerful, it observes, with 32% jumps and outperformance of the S&P 500 by 30%.

Another factor persuading Thatte and team is the flushout in positioning. Three weeks ago it was "clearly elevated." Now it's neutral. The positioning, they argue, is consistent with earnings growth of just 10% for the tech sector whereas the third quarter has witnessed something more like 47% earnings-per-share expansion.

This positioning adjustment reflects the intensified debate about the sustainability of tech earnings, as well as a change in the regulatory environment should the Democrats take control of both chambers of Congress this week.

Tech positioning is well below that implied by earnings growth

This defensive positioning comes despite the strong profitability of the S&P 500 which is showing 31% third-quarter earnings growth. Deutsche Bank points out that even though tech accounts for three-quarters of the growth, the median company is still achieving 14%.

While some strategists have raised concerns about policy shifts resulting from a change of political leadership after the midterms, the asset allocation team makes the case that positioning already reflects some of that risk. Positioning already implies lower earnings growth. Moreover, oil prices (BRN00) are already trading at a 65% premium to what the Deutsche Bank team regards as its fair value. This suggests much of the geopolitical risk premium is already baked in.

-Jules Rimmer

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11-02-26 0447ET