Deutsche Bank: Tech Stocks Have Another 5% Downside Before Long-Term Trend Bottom
TREE NEWS reports: Deutsche Bank’s multi-asset strategy team, which downgraded US tech and large-cap growth stocks from “overweight” to “neutral” on October 9, now says the correction may not be over. The bank estimates that the relative performance of tech stocks versus the rest of the S&P 500 is still about 5 percentage points away from the bottom of its long-term trend channel.
Since the downgrade, tech stocks have fallen roughly 7%, while the rest of the S&P 500 has risen about 5%, a 12-percentage-point performance gap in just two weeks. The bank’s positioning indicators show that institutional exposure to tech has cooled from near a historic high at the 85th percentile in early October to the 33rd percentile, close to lows seen during the US-Iran conflict.
Market Implications
Deutsche Bank believes that without a major external shock—such as a tariff escalation or geopolitical conflict—the current adjustment is more likely to manifest as sector rotation rather than a systemic selloff. Historically, tech’s relative performance has reversed near the bottom of this channel, and in two of the past five rotation cycles, tech briefly broke below the lower bound during tariff shocks and the US-Iran conflict.
However, the bank acknowledges that history does not guarantee this time will be the same. If external risks escalate, tech could break below the channel. The key factors that will determine the next leg are: whether earnings can support long-term growth expectations, whether fund flows continue to exit, and the upcoming Fed meeting and US midterm elections.
Positioning data suggests that investors are still buying the dip, but confidence is fragile. About $30 billion flowed into tech funds over the past two weeks, including $12 billion into leveraged ETFs. But on Thursday, when tech stocks fell again, daily flows turned negative by about $1.5 billion. The bank also notes that current tech positioning implies long-term earnings growth expectations of about 10%, well below the market’s forecast of 65% year-over-year earnings growth for the third quarter.
While tech positioning has cooled, other sectors have room to benefit. Financials, materials, consumer staples, and industrials are all at relatively low positioning percentiles, while energy stands out at the 81st percentile. Europe, with tech making up only about 9% of its market versus 40% in the US, could offer relative advantages.
Deutsche Bank maintains its S&P 500 target of 8,000 for 2026, based on EPS forecasts of $358 for 2026 and $420 for 2027. The bank emphasizes that the downgrade was about short-term risk-reward, not a change in its long-term positive view on tech. Over the past decade, tech has delivered annualized excess returns of about 14 percentage points versus the rest of the S&P 500, driven by stronger earnings growth.
Key Takeaways for Investors
- Tech stocks may still have about 5% downside relative to the broader market before reaching a historically significant support level.
- The correction is likely to be a rotation rather than a broad market crash, unless a major external shock occurs.
- Earnings season will be critical: strong results could stabilize tech, but doubts about long-term growth may persist.
- Fund flows are turning cautious—dip-buying has slowed, and a sustained outflow could extend the adjustment.
- Other sectors and European equities could benefit as tech positioning cools.
