Deutsche Bank Sees Tech Rebound After 16% S&P 500 Lag

By Amara Osei

Deutsche Bank has reinstated an overweight recommendation on technology stocks after the sector trailed the S&P 500 by about 16%. Its strategists forecast another V-shaped rebound, noting five recoveries from the same long-term trend level over the last 30 months.

The reversal comes only three weeks after Deutsche Bank downgraded technology to neutral. Parag Thatte, Binky Chadha and Karthik Prabhu published the note Friday. Deutsche Bank’s bullish case rests on “three Ps”: positioning, performance and the perception of earnings growth.

Deutsche Bank separates the setup into three signals. Performance captures the sector’s decline and prior recoveries, while positioning measures how heavily investors are positioned. The bank treats the current perception of earnings growth as a third support for restoring an overweight recommendation.

What changed in Deutsche Bank’s call?

The correction in the mega-cap growth cohort was emphatic, according to Deutsche Bank. Its figures put the group’s decline at 11% against an almost 6% gain for the rest of the S&P 500, creating roughly 16% underperformance.

Deutsche Bank placed technology at the bottom of its long-run trend channel after the decline. The bank says the sector has produced a V-shaped rebound five times in the last 30 months from that level. After a difficult October, the team now says the risk-reward profile favors overweighting technology.

How strong were the earlier rebounds?

Deutsche Bank’s review found gains of 32% in previous recoveries. Technology also outperformed the S&P 500 by 30% during those rebounds, according to the bank. Thatte, Chadha and Prabhu wrote: “the spring is coiled again.”

Deutsche Bank’s note acknowledged earlier shocks, including “Liberation Day” and the start of the Iranian crisis. Those shocks pushed the sector lower, according to the note. Even so, the strategists now see risk and reward tilting back toward technology.

Why does positioning matter?

Three weeks ago, Deutsche Bank called technology positioning “clearly elevated.” It has since moved to neutral, according to the bank. The strategists say that neutral level is consistent with earnings growth of only 10% for the technology sector.

Third-quarter earnings-per-share expansion in technology was closer to 47%, Deutsche Bank said. The team cited that gap between the growth implied by positioning and the growth already delivered in making its case for overweight exposure.

How much risk is already priced in?

Deutsche Bank links the defensive positioning to an intensified debate about the sustainability of technology earnings. It also links the adjustment to a possible regulatory change if Democrats take control of both chambers of Congress this week.

Deutsche Bank cited other strategists’ concerns about policy shifts resulting from a change in political leadership after the midterms. Its asset allocation team counters that current positioning already implies lower earnings growth. The team also says positioning reflects some of that political risk.

Oil prices are trading at a 65% premium to what Deutsche Bank regards as fair value, the strategists said. The bank interprets that valuation as evidence that much of the geopolitical risk premium is already baked into prices.

Deutsche Bank’s broader market comparison shows an S&P 500 with 31% third-quarter earnings growth. Technology accounts for three-quarters of that growth, the bank said. The median company in the index is still achieving 14%, according to Deutsche Bank.

The next test for Deutsche Bank’s call is whether technology earnings can stay near the third quarter’s 47% expansion rather than retreat toward the 10% growth implied by neutral positioning. If that earnings gap persists, the bank’s rebound case gains support; political and geopolitical risks could still alter the path.