The market value of the Nasdaq has evaporated by approximately $800 billion in two days! When will the sell-off of technology stocks end?

According to the latest information from the Zhongtong Finance APP, the upward momentum of technology stocks seems to have reversed recently, and investors who have awakened from the AI dream have begun to worry again: when will the market sell-off stop?

According to data, the Nasdaq 100 index has fallen 11% from its high point in July, wiping out about one-third of the AI-driven gains, including the overall market value evaporating by about $800 billion in the past two days. In response to this, bold strategists and traders questioned on Thursday that there may be more pain in the future. They said that there is still room for compression in the price-earnings ratio, and the volatility of US Treasury bonds is still too high to confidently judge that the market has bottomed out.

Indeed, no one knows where the market will bottom out or if the sell-off has already ended. But in terms of how to think about where the bottom may form, various strategists have provided estimates based on technical analysis, valuation comparisons, and comprehensive factors such as how much impact the AI oligarchs that drive stock prices will suffer.

Returning to the March level

Although valuation is not a good tool for judging timing when the market is rising, it can sometimes serve as a threshold for market sentiment when the market reverses, as traders can glimpse entry points from it. Over the past 10 years, the average valuation premium of the Nasdaq relative to the S&P 500 index has been about 30%. Sameer Samana, Senior Global Market Strategist at Wells Fargo Investment Research Institute, said that under the same conditions, it would take the Nasdaq to fall to 12,500, which was the level seen in March this year, to restore this balance.

"This may be where long-term investors start to try, especially considering some of the themes that the index benefits from," Samana said. "The open question here is whether interest rates will stabilize around 5% or continue to rise; whether there is an economic recession, and if so, how much it will affect the earnings per share of these growth companies."

"Other stocks are catching up"

Kevin Gordon, Senior Investment Strategist at Jiaxin Wealth Management, believes that the valuation gap between the seven largest technology companies in the market and the average level of the S&P 500 index constituents makes the current sell-off inevitable. The strategist believes that large technology companies will further decline, while other stocks in the market will catch up.

Gordon said that even if the price-earnings ratio of the Nasdaq drops from 35 times to slightly below 30 times within three months, the index still has a lot of room to fall to historical average levels. The main catalyst for this situation may be the compression of the price-earnings ratio and the downward adjustment of expected earnings.

The rise in interest rates has intensified competition for capital, which may further exacerbate the sell-off and volatility. Currently, the yield of 10-year US Treasury bonds is roughly the same as the yield of the S&P 500 index.Gordon said, "In fact, I believe it is healthy to see more funds flowing out of 'high-priced stocks' as other stocks in the market catch up. Since this summer, one major risk that we have been emphasizing is that the performance of other parts of the market (excluding the seven giants of the US stock market) has reached unprecedented levels of underperformance compared to the S&P 500 index."

A new 10% decline

According to Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, the selling that started this week could easily turn into a new 10% decline for the Nasdaq. The tech-heavy Nasdaq opened this week at around 14,600 points, and Zaccarelli believes that a decline to 13,000 points is not out of the question - especially if Apple (AAPL.US) underperforms. The Nasdaq could even drop to 13,000 points in early November. As of Thursday's close, the index closed at 14,110 points.

Data compiled by Ned Davis Research shows that the median price-to-earnings ratio of the eight major tech stocks - Apple, Amazon (AMZN.US), Google (GOOGL.US), Meta (META.US), Tesla (TSLA.US), Nvidia (NVDA.US), Microsoft (MSFT.US), and Netflix (NFLX.US) - is 35.4 times, higher than the long-term average of 28 times. Rob Anderson of NDR stated that excluding the rebound after the pandemic in 2020 and 2021, this figure is close to its historical high.

On Wednesday, the Nasdaq fell 2.5% due to Google's underwhelming cloud computing performance overshadowing Microsoft's strong sales. This marked the largest single-day decline this year. On Thursday, the Nasdaq plummeted nearly 2% again, as Meta's performance dampened hopes for a long-term recovery in the advertising industry, and GDP data showed that the US economy is overheating, reigniting concerns about further tightening of monetary policy by the Federal Reserve.

Zaccarelli said, "The biggest driving factor at the moment is the release of earnings reports, which can cause market volatility almost instantly or within a day. The estimated 10% decline shows additional uncertainty compared to an actual recession, and there is still a long way to go for GDP growth of 5% to turn negative."

Interest rates are the key to everything

In fact, if we remove the deviation caused by the weight of large-cap stocks in the Nasdaq, this decline is not so severe. Compared to market capitalization-weighted, the Nasdaq, calculated on an equal-weighted basis, is expected to have its best week since July.

Michael Matousek, Chief Trader at US Global Investors, said, "You can say that when the market capitalization-weighted index falls to the same level as the equal-weighted index, selling will stop, and that's correct. But this is a rate-driven crash, so ultimately everything depends on the Federal Reserve. You can point to a number and say, yes, valuations are finally attractive, but if interest rates continue to rise at such a fast pace, that number doesn't mean much. This is a rate game."

Currently, the market capitalization-weighted Nasdaq is still up 29% compared to the same period last year, while the equal-weighted Nasdaq has risen by 11%.