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iShares Semiconductor ETF (SOXX), Palantir (PLTR) might fall further come the next S&P pullback, with semis up 66% year-to-date and Palantir trading at a triple-digit P/E ratio that could face a 50% haircut according to Jefferies’ $70 price target.
The tech sector, particularly semiconductors, faces heightened vulnerability to a market pullback as valuations have become stretched on euphoria surrounding AI and semiconductor gains, while bearish investors including Michael Burry position against semis and Palantir through puts.
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Market pullbacks can happen when investors least expect it, when there are fewer risks on the radar or complacency about the existing slate of risks on the table. While market corrections can be scary to move through, I think that the most horrific thing about corrections is the potential to impair one's returns by attempting to steer clear of them.
Indeed, rushing to cash and timing the markets can save you a great deal if you get the timing right. But if you get it wrong, it could prove tough to get back in, and that's not even considering the inflation hit your cash reserves will take.
In any case, staying invested despite any fears of a market pullback, in my opinion, is the way to go. But staying invested means living through those pullbacks. Sometimes, there can be many pullbacks that really test not only your emotions, but your patience.
Nobody knows when that next big spill will be, but the tech sector does tend to take a bigger hit to the chin when markets slide, and the bear is in control. The better tech and the Nasdaq 100 do, the more drastic the pain on the way down stands to be.
Of course, not every correction is led by tech, but given the kind of heat we've witnessed in AI and semis, let's just say I wouldn't be surprised if history were to repeat itself come the next market drawdown.
Fundstrat's star expert, Tom Lee, has made so many great calls. It's hard to do, but his track record is among the best on Wall Street. In fact, Lee called the latest run-up in markets, with 7,700 for the S&P 500 in sight by the end of the year, which would have been a bit outlandish just over a month ago, when it felt like the index would tumble below the 6,000 mark.
With Lee calling a run toward 7,300 earlier this year (the S&P is at 7,400 now), while bracing for volatility to follow, it seems like we are overdue for increased choppiness. And investors might wish to be prepared to ride things out. While I suspect the Mag Seven names will be relatively decent, I'm not so sure what the future holds for the semis, especially after the iShares Semiconductor ETF (NASDAQ:SOXX) rocketed close to 66% year to date.
The semis have gone parabolic, and it'd make me quite uncomfortable to keep hanging onto the basket of blistering names. Though time will tell, I do think the semis could lead the next pullback as investors start taking profits. Some of the big semi names have already doubled in the year. Even if the bull case calls for more gains, I think the odds of getting back in at lower prices at some point down the road are high.
And with Michael Burry hanging onto his bearish put options against the semis, I think the semi bears are in good company as the market rally's durability gets put to the test. With a 2.06 beta and so much euphoria surrounding the names, I think caution is more than advisable in a corner of the market that may very well be getting a little bit on the bubbly side.
Another name that might be in for a doozy if tech and markets go south is Palantir (NASDAQ:PLTR), which Burry is also betting against with bearish put options. If you don't buy the bearishness of Burry, perhaps Jefferies latest note and $70.00 price target could be worth consideration. That figure implies a nearly 50% haircut from current levels.
While CEO Alex Karp's commentary was encouraging after a blowout quarter (yes, it really was that good), I just can't say I'm in a hurry to buy a stock with a triple-digit price-to-earnings (P/E) with that troubling chart in a hot market. If the explosive quarters keep coming and the multiple really compresses, I'll reconsider. But until then, I fear what could happen once tech turns and fear kicks in. Despite the game-changing growth, Palantir is too scary a hold, in my opinion. In short, great company, but hefty price of admission and a tough chart to back.
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