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When it comes to tech stocks, should you buy the dip—or tear up the playbook?

March 8, 2021, 10:00 AM UTC

Is it time to take some tech off the table?

Stocks had a volatile trading session on Friday, with the S&P 500 and Nasdaq both deep in the red in early trading before recovering ground to close up nearly 2% and 1.6% higher, respectively.

But notably the high-growth tech sector has tumbled in recent days, with the tech-heavy Nasdaq briefly turning negative for the year on Thursday before bouncing back on Friday to close up 0.3% year to date.

According to some on the Street, the “fundamental reason” why tech has taken a hit lately is because “valuations have come to be extraordinarily stretched and highly dependent on interest rates remaining at these just historically low levels,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, suggests to Fortune. “Now, the move that we’ve seen is a reflection of the fact that real growth is improving.”

Indeed, improving economic data (including a better-than-expected jobs report Friday) has come hand in hand with rising Treasury yields that have worried markets, with the 10-year yield spiking to over 1.6% at points on Friday (higher than the S&P 500’s estimated dividend yield at 1.5%, per S&P Global data).

Traditionally cyclical sectors, like energy, financials, and industrials, have all traded up in recent weeks: Energy in particular has been a big outperformer, up 23.5% in the past month, while financials are up 9% and industrials have traded 4.8% higher, per S&P 500 sector data. That’s compared to the Nasdaq trading down over 7% in the past month, flirting at times with correction territory.

“A lot of people were kind of crowded into these names because that’s where the growth was,” Wells Fargo Investment Institute’s senior global market strategist Sameer Samana tells Fortune. “Now, as things kind of reopen and broaden out, people are finding additional opportunities.”

So with all the volatility afoot, the question may now be: Buy the dip on tech darlings, or lean into the rotation trade?

A “new playbook”

Some on the Street are viewing the recent moves as an opportunity to reevaluate your portfolio for the next market phase.

“I would not be buying the dip. Don’t use the playbook from the last 12 years. That’s my message…You need a new playbook,” says Morgan Stanley’s Shalett. She argues we’ve entered a new business cycle, and “when you have a new business cycle, you get sector rotation.”

This time around it will be “defined by new trends,” suggests Shalett, including capital spending on things like the digitization of services, housing, automation, robotics, and semiconductors.

Samana, meanwhile, believes both growth and cyclicals can do well moving forward. “For the equity market to go higher, tech’s got to participate. It’s just such a large weighting,” he says. “It’s that part that I think is lost on a lot of investors that are kind of viewing this whole thing as a light switch, where it’s like, “Oh, well, I’ll just go from tech all the way over to financials.’”

Indeed, LPL’s Jeff Buchbinder says he’s taking a more balanced approach: He argues there are pockets of growth that will continue to be attractive (he points out tech has some of the better fundamentals), but notes that the strength we’re seeing in cyclical value stocks is likely to persist for a bit longer.

Be selective on tech

That doesn’t necessarily mean investors should shun Big Tech altogether.

There are some bulls like Wedbush’s Dan Ives who argue that “this provides a ‘golden opportunity’ to own the secular tech winners for the next 12 to 18 months at compelling valuations given some of these selloffs,” he wrote in a Thursday note. Ives predicts tech stocks will shoot up another 30% in the coming year, “led by FAANG, cloud, and cybersecurity names,” he argues, pointing to stocks like Microsoft, Apple, and DocuSign.

Within her theme of a shifting business cycle, Morgan Stanley’s Shalett is eyeing stocks in payments processing, fintech, and semiconductors and storage. But in general she’s advising that investors focus on stocks that have more room to grow: “When everything’s expensive, you want to own the things that have the greatest chance of surprising on the upside,” she says. “That’s not to say some of these tech companies aren’t good companies—they’re good companies, they may just not be great stocks right now.”

Wells Fargo’s Samana, meanwhile, is looking at the “relative winners and losers coming out of the pandemic.” Within tech, the pandemic winners were software-related work-from-home names, he says, whereas now, the companies that are benefiting are more in areas like semiconductors, “right as we go back to driving and purchasing vehicles and building things.”

As for Buchbinder, he’s weaving in “some valuation discipline in our tech, and maybe a little bit more cyclicality,” noting he’s adding in small-cap and midcap names. 

But for the time being, some market pros think we’ve seen the worst of the selloffs. With the promise of imminent fiscal stimulus on the horizon, Samana argues, “we’re probably through the majority of this correction.”