Recent selling pressure in the U.S. technology sector has persisted, with artificial intelligence (AI)-related stocks coming under particular strain. However, Matt Orton, Chief Market Strategist at Raymond James Investment Management, believes this round of adjustment is more akin to a process of investors reassessing tech stock valuations and growth expectations rather than a signal that the market is on the verge of a full-blown crash. Despite near-term pressure on tech stocks, industry fundamentals remain strong, and share price pullbacks may actually create buying opportunities for investors.
In an interview, Orton said the current decline in tech stocks is indeed painful for investors, but the problem lies more in previously excessive market expectations and overly concentrated positioning rather than a fundamental change in companies' long-term growth prospects. He cited Google parent company Alphabet (GOOGL.US, GOOG.US) as an example, noting that although the company's cloud computing business continues to grow, its latest financial report still fell short of investors' previously high expectations, weighing on the stock price. As tech giants continue to expand AI infrastructure buildouts, meeting growing computing power demand requires massive capital expenditure, and the market is currently reassessing the impact of these outlays on corporate earnings and cash flow.
Orton stated: "Our investment strategy this year has consistently been to avoid chasing highs and instead look for opportunities when the market declines." Regarding the recently closely watched issue of deteriorating free cash flow at tech giants, Orton's stance is relatively optimistic. He noted that Amazon (AMZN.US) has seen its free cash flow over the past 12 months drop to negative $42 billion, but he believes that negative free cash flow at such companies due to large-scale investment is likely only temporary. "Overall, I can accept these companies temporarily having negative free cash flow because it is just a transitional phase."
Orton specifically mentioned Microsoft (MSFT.US), believing the company has performed outstandingly in controlling expenses and maintaining cash flow. Microsoft has maintained financial discipline through measures such as adjusting workforce size and is not expected to fall into negative free cash flow like some peers.
Meanwhile, Orton believes another major issue currently facing tech stocks is that investors' performance demands have become almost impossible to satisfy. He pointed out that among AI tech companies that reported better-than-expected results, only about 25% saw their stock prices rise after earnings releases, while another 25% actually saw their stock prices fall by more than 5%. This means that even when companies deliver financial reports exceeding market expectations, they may not gain investor recognition.
The semiconductor industry faces a similar situation. Orton said some chip companies not only announced strong financial results beating analyst expectations, but also had order demand visibility extending to 2029 or even 2030, yet their stock prices still declined. In his view, this further demonstrates that the current tech stock adjustment is not entirely driven by deteriorating fundamentals, but rather the market is digesting previously excessive growth expectations and valuation levels.
It is worth noting that despite pressure on tech stocks, Orton is encouraged by the trend of U.S. stock market momentum gradually spreading to other sectors. He pointed out that the healthcare sector has performed strongly recently, with pharmaceutical companies such as Eli Lilly (LLY.US) showing good growth momentum in their financial reports. Additionally, consumer-related industries such as cruise lines are also sending positive signals, indicating that investment opportunities beyond tech stocks still exist in the market.
However, Orton does not believe all traditional defensive sectors are worth buying. He noted that industries such as consumer staples and utilities, while typically viewed as safe-haven choices during market turbulence, currently lack sufficient appeal due to slower growth rates. He emphasized that although improved performance in other sectors helps broaden the foundation for U.S. stock gains, large technology companies remain an important force driving the overall market higher. "Ultimately, these market leaders and tech stocks still need to perform in order to push the broader market further up."
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