After a bad month on the markets, is this the end of volatility?

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Is it over? Can we stop watching the stock market through our fingers?

The last three days have at least given investors a reprieve from the intense volatility that got the year started on such a foul note, as a violent repricing of some of the world’s hottest investments reverberated through financial markets.

Surveying the damage, there is a lot to soothe frayed nerves. The pain was highly concentrated among the pandemic’s biggest winners, like the tech sector. Many of them, Shopify Inc. included, saw at least 40 per cent of their market value wiped out in just a few weeks.

That made for a brutal January for a tech-laden index like the Nasdaq Composite, which saw a peak-to-trough slide of 16 per cent.

But for the Toronto Stock Exchange, which is famously light on large-capitalization tech outside of Shopify, it was a garden-variety dip. The sell-off in the S&P/TSX Composite Index within the month didn’t even hit 5 per cent, and most of that has since been regained.

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One very bad month for the tech sector is probably not prelude to an all-consuming global bear market, said Stephen Lingard, the head of investment research of CI Investments’ multi-asset team.

“If you’re heavily overweight the U.S. and technology, this has been an eye opener,” Mr. Lingard said. “But we can now be a little bit more optimistic on non-U.S., on cyclicals, and on the Canadian market.”

In other words, precisely the opposite of what pandemic-era investing has looked like.

For nearly two years, the stock market has feasted on the vast amounts of stimulus supplied by central banks and governments. Near-zero interest rates and soaring household savings stoked the appetite for risk and sent retail investors clamouring for the most speculative investments they could find.

Now confronted with inflationary pressures that refuse to fade away as widely predicted, central banks must throw the great stimulus machine into reverse.

Tightening policy in the midst of a global public health crisis, while economic growth is also starting to weaken, is a lot for investors to digest.

Gone is the tolerance for companies that consistently lose money. Consider stocks in the S&P 500 index that have posted losses in at least four of the last six years, while also having negative earnings per share now, Scotia Capital analyst Jean-Michel Gauthier wrote in a report.

That basket of stocks has come under monumental pressure. It lost 10 per cent of its value in November, an additional 11 per cent in December, and a whopping 30 per cent in January.

“The last time their underperformance was this severe, we were in the early innings of the tech-bubble implosion,” Mr. Gauthier said.

But this is not 1999. Today’s tech giants generally have the earnings power to justify their immense global profiles.

The rest of the market, however, has caught up to the tech sector in terms of profit growth, Mr. Gauthier said, “raising questions as to why technology, media and telecoms should deserve such a high valuation premium.”

Even after the recent sell-off, the S&P 500 Growth Index, which is loaded with tech stocks, trades at about 25 times earnings estimates for the next 12 months. The price-to-earnings ratio on the S&P 500 itself, meanwhile, sits at about 20, while the S&P/TSX Composite Index is trading at less than 15 times.

“People say all stocks are expensive, but mostly that’s a U.S. story,” Mr. Lingard said. “U.S. valuations are in the 90th percentile of their historical averages. Other markets, including Canada, are closer to average.”

As the air has come out of the more speculative pockets of financial markets in recent weeks, the rest of the market remains largely intact. Sectors such as financials, energy and materials are attractively priced and poised to generate profit growth at market-leading rates – a very strong setup for the TSX, Mr. Lingard said.

“For Canada, absent a recession, we expect 15- to 20-per-cent upside this year.”

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