Deutsche Bank, which "accurately called the top" two weeks ago: Tech stocks need to "fall another 5%" to reach the "long-term trend bottom"

Two weeks after Deutsche Bank downgraded its rating on US tech and large-cap growth stocks, the performance gap between tech stocks and other index components widened rapidly. Now, the bank points out that the adjustment may not be over: the performance of tech stocks relative to the rest of the S&P 500 still has about 5 percentage points of room to decline before reaching the bottom of the long-term trend channel.

According to a previous article from Wallstreet News, on October 9, Deutsche Bank's Multi-Asset Strategy Team downgraded US large-cap growth & tech (MCG & Tech) stocks from “overweight” to “neutral”, believing that the sector’s risk-reward profile had become severely imbalanced. In the two weeks since, tech stocks have fallen about 7%, while the rest of the S&P 500 rose about 5%, resulting in a 12 percentage point performance difference.

Despite a clear pullback in tech stocks, Deutsche Bank’s institutional positioning indicators show allocations have not yet dropped to extremely low levels. Meanwhile, about $30 billion flowed into tech funds over the past two weeks, with some investors still buying the dip; however, the latest trading session saw a net outflow.

Deutsche Bank believes that absent major external shocks such as tariff impacts or geopolitical conflicts, this adjustment is more likely to manifest as sector rotation, rather than a systemic decline in US equities. The distance tech stocks have left to the bottom of the trend channel, whether earnings reports support profit expectations, and whether capital continues to exit will determine the next phase of this adjustment.

Tech stocks still have about 5 percentage points to the bottom of the long-term trend channel

According to Deutsche Bank’s tracking, the relative performance of tech stocks versus the rest of the S&P 500 has entered the lower half of the long-term trend channel, but still has about 5 percentage points left before reaching the bottom. Historically, this position has often marked the starting point for the reversal of tech stocks’ relative performance.

Among the past five rounds of sector rotation, tech stocks briefly broke below the channel’s lower bound twice—once during a tariff shock, and once during the US-Iran conflict. Deutsche Bank believes that if this round does not experience a similar magnitude of external shock, tech stocks are more likely to stabilize near the channel bottom, rather than see a systemic decline.

However, historical trends cannot guarantee that this adjustment will stop at this position. If external risks escalate, tech stocks could still break below the channel’s lower bound.

Tech stock positioning cools rapidly, $30 billion dip-buying faces pressure

Deutsche Bank data shows that institutional positioning in tech stocks has dropped from near the 85th percentile (a historical high) at the start of October to the current 33rd percentile, close to its low during the US-Iran conflict.

Overall equity positioning has fallen to the 41st percentile, with active investors at just the 18th percentile—the lowest in over a month. Systematic strategies remain at the 79th percentile. Small-cap allocations are even more cautious: at the 12th percentile, the lowest since April 2023.

Meanwhile, tech funds have seen net inflows of around $30 billion over the past two weeks, with roughly $12 billion flowing into leveraged ETFs. But when tech stocks declined again on Thursday, the day saw net outflows of about $1.5 billion.

This means dip buying remains an important feature of recent capital flows, but investor confidence is unstable. If outflows persist, the correction may be prolonged; if market sentiment warms, funds could return quickly and accelerate a rebound.

Earnings season will test expectation gaps; profitability may be key to reversal

Deutsche Bank believes that earnings performance will be a crucial factor in determining whether tech stocks can stabilize. Historically, there were two rebounds after tech stocks neared the bottom of the long-term trend channel, in July last year and April this year, both accompanied by strong earnings during reporting season.

Current market concerns are focused on medium- to long-term profit growth rather than short-term results. Deutsche Bank estimates that the profit growth expectation implied by current tech stock positioning is around 10%, much lower than the roughly 65% year-over-year profit growth forecast for the third quarter.

If companies deliver as expected, tech stocks may see room for recovery; but if earnings fail to dispel doubts about long-term growth, even strong short-term numbers may not reverse trends. Next week’s Fed rate meeting and the upcoming US midterm elections could also influence market risk appetite and capital allocation.

European and non-tech sectors may benefit; Deutsche Bank maintains S&P 500 target

Reduced tech stock allocations make room for other sectors. Deutsche Bank data shows financial stocks are in the 20th percentile, materials at the 25th, consumer staples at the 15th, and cyclical industrials at the 27th—all at relatively low levels; the energy sector is an exception, with positioning at the 81st percentile.

In terms of regional allocation, European market tech stocks account for about 9%, much lower than the roughly 40% in the US market, suggesting Europe may have a relative advantage when tech underperforms.

Deutsche Bank is maintaining its 2026 S&P 500 target of 8,000 points, corresponding to EPS of $358 in 2026 and $420 in 2027. The bank emphasizes that this downgrade is based on short-term risk-reward, not a change to its long-term growth outlook for tech stocks. Over the past decade, tech stocks have delivered an annualized excess return of about 14 percentage points over the rest of the S&P 500, and stronger profit growth remains the key long-term support.

Overall, Deutsche Bank’s view is not that the long-term trend for tech stocks has reversed, but that there’s still room for short-term relative adjustment. The degree to which earnings materialize, capital flows, and external shocks will determine whether this sector rotation can stabilize near the bottom of the trend channel.