Deutsche Bank: The "fifth round of tech stock rebound" in US equities since late July has peaked; prepare for an "inverted V reversal"

Deutsche Bank downgraded US tech stocks from overweight to neutral, noting that the fifth round of tech stock rebound that began on July 29 has approached the upper bound of the long-term trend channel. Current upside is only about 4 percentage points, while historical patterns show downside risk can reach 16 percentage points; funds are expected to rotate into other sectors, and European markets, with lower tech exposure, are expected to benefit relatively, though it emphasized that the long-term trend of tech stocks outperforming remains unchanged. This round of US tech stock rebound that began on July 29 has outperformed the broader market by a cumulative 18.1 percentage points over 52 trading days. But in Deutsche Bank's view, this rally has already peaked. According to news from the trading desk, on October 9, analysts including Parag Thatte from the bank's multi-asset strategy team released a report downgrading US tech and large-cap growth stocks (MCG & Tech) from "overweight" to "neutral." The analysts wrote: The rotation in tech stocks has gone far, and the near-term risk-reward is no longer attractive. An inverted V-shaped reversal is coming? Deutsche Bank tracked five rotation cycles in US tech stocks over the past two years. Data shows that the median gain of the previous four rebounds was about 29.5 percentage points (relative to the broader market), while this round had cumulatively outperformed by 18.1 percentage points as of October 8. The analysts pointed out that the current relative performance of tech stocks has approached the upper bound of the long-term trend channel exactly the starting point of several previous reversals. Specifically, tech stocks currently still have about 4 percentage points of upside relative to the broader market before touching the top of the channel, but once they peak and pull back, historical patterns show the relative downside can reach 16 percentage points. The report wrote: Past rotations all showed inverted V-shaped reversals. Asymmetric positioning: tech overweight, most other sectors underweight Positioning data also supports this judgment. As of October 8, positioning in tech and large-cap growth stocks was at the 58th percentile. Although it has pulled back from recent highs, it is still clearly overweight. At the same time, other sectors are in a very different situation: Financial stock positioning fell to the 17th percentile, a significant underweight Industrial cyclicals were at the 38th percentile Materials stocks were at the 20th percentile Consumer staples were at the 19th percentile The analysts pointed out that overall active investor positioning was at the 32nd percentile, already a mild underweight; although systematic strategy positioning was at the 85th percentile, it has also pulled back recently. Strong earnings may struggle to lift share prices, market focus has shifted The analysts expect US tech stocks' third-quarter earnings growth to be about 55%, continuing the previous strong momentum. But this may no longer be enough to drive share prices further higher. Market concerns are now concentrated on future profitability, a problem that is difficult to eliminate in the short term. By contrast, the expectations bar for non-tech sectors is extremely low the market generally believes these sectors have almost no growth. But Deutsche Bank forecasts that non-tech sectors' third-quarter earnings growth will be about 21% (year-over-year), little changed from 23% in the second quarter, and the median S&P 500 company's earnings growth is expected to remain at a relatively high level in the teens. "The bar for other sectors is very low, and the market generally believes there is almost no growth there but in fact growth remains quite strong." The analysts believe this expectation gap forms the basis for rotation. Direction of rotation: funds flow to other sectors, market breadth expected to improve The analysts believe that the high concentration in tech stocks has historically raised concerns about insufficient breadth, and the past two months were no exception. Once funds rotate from tech stocks into other sectors and small caps, this concern is expected to ease. From historical data, during the tech stock rotation-out phase, the median gain of non-tech sectors was about 3 percentage points, while tech stocks fell by an average of about 14.8 percentage points. Across regions, the report pointed out that tech stock exposure is a key variable determining regional market performance. Europe, where tech accounts for only 9%, has an advantage in the rotation compared with the US market, where tech accounts for 40%. Major decline risk: historical experience warns to watch for external shocks Whether the tech stock rotation-out will be accompanied by a broader market decline is a key question. The analysts wrote: Recent history suggests the answer is yes but note that these rotations often coincided with major external shocks, such as the 'Liberation Day' tariff shock and the outbreak of the Iran war, events that dragged all stocks lower together. In other words, without a major external shock, this rotation is more likely to be a structural sector rebalancing rather than a systemic market decline. Long-term trend unchanged: the logic for tech stocks' long-term outperformance still holds It is worth noting that Deutsche Bank's downgrade this time is only at the short-term tactical level. The analysts said the long-term trend of tech stocks outperforming the broader market remains intact. Over the past decade, tech stocks outperformed the rest of the S&P 500 by about 14 percentage points annualized, supported by persistently stronger earnings growth. We believe this dynamic will not change. This article is reprinted from Wall Street CN, GMTEight editor: Chen Yufeng.