With the market fully taking into account the rising interest rate expectations, since April, the numerator-end EPS has begun to replace the denominator-end interest rate as the core variable affecting the trend of U.S. technology stocks. At the same time, the conflict between Russia and Ukraine, and continued high inflation, superimpose the Fed’s firmness in curbing inflation. The determination has also made the market’s short-term macro expectations as chaotic and divergent as it is currently, and has brought about the continuous high volatility of the market recently.

We judge that the volatility of the US stock market is expected to continue until macro data such as inflation show substantial improvement or follow signals. It is not appropriate to be overly pessimistic about short-term declines, nor overly optimistic about short-term rebounds.

The capital market is always accustomed to overestimating short-term impacts and underestimating medium- and long-term trend changes. Facing short-term unpredictability, the most effective way is to downplay short-term fluctuations and focus on medium-term trend opportunities.

We judge that the 2C Internet user dividend of the US stock technology sector is still there, and the cloudification and digitization of enterprises will continue to constitute the core support for the sector in the mid-term. Downside protection, medium-term dimension, the upside benefit is significantly greater than the downside risk.

We recommend investors to cherish the investment opportunities created by each market correction, and select a group of high-quality technology companies for investors’ reference, including: Microsoft, Nvidia, Tesla, Amazon, Apple, Google, Salesforce, ServiceNow, Snowflake, Datadog, MongoDB, Meta, TSMC, Qualcomm, Wolfspeed, etc.

▍ Market review: from “trading inflation” to “trading recession”

After November 2021, affected by the rapid tightening of liquidity expectations and the decline in the growth rate of the sectors benefiting from the epidemic in the previous period, the technology sector of US stocks continued to adjust following the overall market:

1) From November 2021 to March 2022, high-value growth stocks led the decline. During the period, the overall Nasdaq fell by 8.8%, of which the overall market value of high-growth companies fell by 14.0%, and value stocks fell by 3.7%;

2) From April 2022 to the present, with the Russian-Ukrainian conflict, the risk of weakening the European economy, etc., as well as the possible backlash risk of continued high inflation on the economy, the market has begun to take into account more concerns about the economic recession. Value stocks have begun to adjust significantly, such as Apple, Microsoft and so on.

Based on the conservative performance outlook in the Q1 financial reports of major companies, as well as the recent thunderstorms in the performance of some consumer stocks, the market is increasingly worried about the economic recession, and the market volatility index has also begun to rise significantly, but considering that the United States is still relatively good consumption. Data, as well as inflation data peaking and falling, the market is more of a limited worry about the future economic outlook, consensus and disagreement coexist, and volatility is far lower than the level at the beginning of the epidemic in 2020.

▍Market judgment: Short-term volatility is expected to continue, and EPS will become the focus of follow-up

Since the beginning of the year, the cumulative decline of the major US stock indexes has reached between 15% and 20%, which is basically in line with the characteristics of a bear market. From the characteristics of the two bear markets of the US stock market in 1930 and 2000, the market shows that the valuation is adjusted first, and then the EPS is adjusted. Growth stocks fall first, followed by value stocks.

Considering the many potential risks in the short term, the view that some so-called markets have bottomed out is still very debatable. At present, the market’s expectation of the Fed’s interest rate hike has been relatively fully taken into account. We believe that the core variable affecting the follow-up stock price trend is no longer the interest rate, but the judgment on the economic outlook and corporate profit expectations.

Regarding the short-term macro trend, the market is extremely worried and full of divergences, and we are unable to judge.

At the same time, the market’s 2022 earnings expectations for the core index of the US stock technology sector and representative stocks have not been significantly revised down, which indicates that the market is still more at the wait-and-see level in the short term. Of course, this also means that if the follow-up macro economy exceeds expectations Downward, the downward revision of sector & individual stock earnings expectations will be a risk that needs to be vigilant.

▍Mid -term judgment: Internet user dividends are still available, and enterprise cloudification and digitalization constitute the medium-term core support for the technology sector

In the face of complex and divergent short-term macro expectations that have never been seen before, the most effective way for us to face short-term unpredictability is to skip short-term fluctuations and focus on medium-term trend opportunities.

In terms of sub-sectors, we believe that the user dividend of the Internet sector has not disappeared in the mid-term, the contribution of high-boom 2B businesses such as cloud computing will gradually increase, and the short-term operating leverage will weaken or will drag down the profit performance; the software SaaS sector is still the most promising in the medium-term, and short-term sales are still the most promising. The cycle may be prolonged, and non-core business systems may be reduced; the hardware semiconductor sector and consumer electronics continue to weaken, and the data center is expected to peak at the end of the year. From the perspective of the industrial cycle, more attention needs to be paid to structural opportunities.

From a valuation perspective, taking the software sector with the deepest adjustment as an example, the current EV/S (NTM) of the software SaaS sector in the US stock market is 6.3x, down more than 50% from the level of 16.9x at the end of October 2021, basically returning to the 2014-2018 level. Level.

At the same time, the valuation levels of major technology giants have basically returned to their pre-epidemic levels. Whether it is based on historical relative levels, or based on a possible medium-term neutral interest rate level (3.0%~3.5%), in the medium-term dimension, the current valuation of the US stock technology sector has been able to provide good downside protection.

▍Investment advice: Dilute short-term fluctuations and focus on medium-term trend opportunities

In the past ten years, the excess returns of the US stock technology sector have been obvious. Looking back, the big opportunities also occurred when the market pulled back sharply. For example, the current Amazon has risen by 540X since the Internet bubble.

In the current U.S. stock market, in the face of extremely chaotic and complex macro expectations in the short term, it is recommended that investors appropriately lengthen the investment cycle and pay attention to the systematic layout opportunities after the sharp correction of the current sector.

Based on the long-term follow-up research on U.S. stock technology stocks, we recommend investors to cherish the investment opportunities created by each market correction. We have selected a group of high-quality technology companies for investors’ reference.

Mainly include: Microsoft, Nvidia, Tesla, Amazon, Apple, Google, Salesforce, ServiceNow, Snowflake, Datadog, MongoDB, Meta, TSMC, Qualcomm, Wolfspeed, etc.

▍Risk ​​factors

Rising crude oil prices lead to the risk of high inflation in Europe and the United States further out of control; the risk of rapidly rising U.S. bond interest rates; the risk of continued tightening of policy supervision on technology giants; the risk of less than expected global macroeconomic recovery; the risk of less-than-expected IT spending by European and American companies due to macroeconomic fluctuations Risks of less than expected development of the cloud computing market; risks of data leakage and information security of cloud computing companies; risks of continued intensification of industry competition, etc.

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