It has been a rough few months for US stocks but even rougher for shares of technology companies. The widely followed and tech-heavy Nasdaq Composite Index is down about 30% since it peaked in November. Investors may be wondering whether tech stocks are a bargain. The answer is no: They’re a lot cheaper but not cheap yet.
One way to measure tech’s decline is to track how much valuations have contracted. The Nasdaq’s forward price-earnings ratio — that is, the P/E ratio based on analysts’ earnings estimates for the current fiscal year — has tumbled to 24 from 42 at the end of 2020, a 43% haircut. While that’s a big move, it merely brings the Nasdaq in line with its historical average P/E ratio back to 2001, the longest period for which numbers are available.