Two charts point to big trouble for tech stocks

Tech stocks have a problem.

On Thursday, as the S&P 500 fell 1.54 percent to suffer its second-worst day of 2017, tech stocks led the way lower, with the S&P’s information technology sector dropping 1.98 percent.

While tech remains one of the best-performing areas of the market, some say the outlook for the group will only darken in the months ahead.

Erin Gibbs, portfolio manager at S&P Global, explains that earnings and valuations make her relatively bearish on the group.

Expected earnings per share growth for the sector was “at about 20 percent for the first half of the year. That’s the reason they were leaders,” Gibbs said Thursday on CNBC’s “Trading Nation.” “For the second half of year, we’re looking at about 10 percent, … and it gets even worse when you get into 2018. So we’re going for these really high growth stocks into really below average stocks.”

Tech stocks are “not even keeping up with the [expected earnings] growth of the overall market,” she added.

At the same time, investors can’t hang their hats on more attractive valuations to compensate for the slower growth; while the sector’s price-earnings ratio has fallen a bit recently, it is still running hot.

“We could see these stocks make about a 9 percent dip from here and still be well within the past six months’ range” of valuations, Gibbs said.

Bill Baruch, senior market strategist at iiTrader, says the chart of the tech-heavy Nasdaq 100 index also suggests more losses for the group.

The index topped out at 5,995.77 in late July before beating a “retreat from 6,000.” With the index backing away from the round number, Baruch foresees about 3 percent more downside.

“I think it’s time to step out of the way for a little bit here, especially if your time frame is sometime over the next year,” Baruch said. “But on the flip side, if your time frame is very long and you’re young and you don’t think your portfolio has enough tech in it, use some of this fallback to start nibbling at some of those better names” in the index.

On Thursday, the biggest decliners within the S&P sector were NetApp, ADP and Cisco.