(Bloomberg) -- Two market strategists are recommending investors add exposure to technology stocks in Europe following a rapid pullback since July.
A 16% drop in the Stoxx 600 Technology Index from a July peak through Monday provided an opportunity to buy the dip, Barclays Plc strategists said in a note on Wednesday, while raising the sector to overweight from market weight.
That sentiment was echoed by Deutsche Bank AG’s Maximilian Uleer and his colleagues. Earnings estimates appear more realistic and valuations are now fair, the bank’s strategists said in a note Tuesday. They upgraded the sector to neutral from underweight and said they see “selective buying opportunities.”
“After the severe selloff in tech, the sector’s valuation is starting to look more attractive again,” the Deutsche Bank team said. Positioning in tech, while still elevated, “is no longer excessive, and even less so in Europe as compared to the US,” they added.
The chase for tech winners in the age of artificial intelligence has turned to a “great unwind” as investors question the sustainability of high investments in AI infrastructure. A global equity meltdown on Monday sank Europe’s tech stock benchmark to the lowest since January.
Concerns over further US restrictions on chip technology exports have weighed on shares of the region’s most valuable tech company, ASML Holding NV. Other semiconductor equipment stocks including ASM International NV and BE Semiconductor Industries NV saw even steeper pullbacks.
Performance within Europe’s software and IT space was mixed. SAP SE rallied to record high in July as its cloud-based enterprise resource planning software saw strong growth, but Capgemini SE and Dassault Systemes SE struggled as corporate clients cut software budgets.
The significant underperformance in semiconductor stocks has left the stock trajectory below their earnings momentum, said Barclays strategist Emmanuel Cau. AI-related capital spending is still robust, which should benefit ASML, while software remains the “quality and more defensive part” of the tech portfolio, he said.
Tech companies’ earnings growth was weaker than the broader European market in the first half but that should reverse for remainder of the year, giving stocks a boost, said Deutsche Bank’s Uleer. Still, he cautioned that elevated earnings expectations for next year may present a risk.
--With assistance from Sagarika Jaisinghani.
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