Yet another encouraging signal for the technology sector

Key points: 

• The percentage of S&P 500 Technology stocks in a bear market recovered from an extreme reading
• Following comparable turnarounds, the tech sector posted gains a year later every time
• Large-cap technology consistently outperformed the S&P 500 from one to twelve months later 

Technology stocks roar back to life from the depths of a bear market

During the depths of the Liberation Day meltdown, the S&P 500 Technology sector experienced severe internal damage, with 91% of its constituents falling into a bear market, defined as a decline of 20% or more from a 252-day high. However, in the months since, the proportion of stocks in a bear market has sharply reversed, collapsing below 36%, a critical level that signals a favorable backdrop for the group.

As shown in the chart below, the technology sector posts an impressive 31% annualized return when fewer than 36% of its stocks are in a bear market, more than double the return observed when this threshold is exceeded. 

Similar recoveries preceded outstanding returns for the tech sector

Whenever the percentage of S&P 500 Technology sector stocks in a bear market transitioned from above 90% to below 36%, the sector displayed remarkable consistency and outsized returns. Furthermore, several time frames exhibited significance relative to random expectations.  

A year later, the group was higher in every case except 1991, a period marked by a challenging stretch for technology, which remained range-bound from late 1987 through early 1994.

Over the following year, the S&P 500 Technology sector experienced declines of more than 10% on four occasions, while it rose by more than 10% in 17 instances, indicating a favorable risk/reward scenario.

Technology outperformed the S&P 500 in every measured period except the two-month span, where it lagged slightly by 0.46%. Consistent with historical tendencies, offensive sectors, most notably consumer discretionary, led the broader market. 

Signals near a high

Although the sample size is small, when a signal occurred within 2% of an all-time high, the tech sector was higher 100% of the time, five, six, and twelve months later.

What the research tells us...

At the worst point in April, over 91% of S&P 500 Technology sector stocks were down 20% or more from their respective highs, reflecting widespread pessimism and capitulation. Subsequently, the group has staged a remarkable recovery, with fewer than 36% of the stocks in a bear market. Similar transitions of this magnitude have led to a rally in the technology sector 94% of the time, a year later, and in every instance when the signal occurred near a high. Furthermore, technology stocks have consistently outpaced the broader market, reinforcing the case for investors to maintain an overweight position in the sector. While profit-taking or tariff headlines may cause temporary setbacks for tech stocks, the big-picture outlook remains compelling, especially given the AI backdrop.