NEW YORK: Rising valuations and significant year-to-date gains for major tech stocks are leading some investors to diversify away from the sector that has dominated markets for years.
Tech stocks have skyrocketed this year, and their heavy weighting in the S&P 500 has helped push the index to record highs with a 25.1% gain since the start of the year in 2021.
Some investors fear valuations have climbed into nosebleed territory. Alphabet, parent company of Google, is trading at a 12-month futures price-to-earnings ratio of 26.6, compared to a valuation of 21.1 for the S&P 500.
Apple Inc is valued at 26.2 futures earnings, while the information technology sector, up nearly 28% this year, has a forward P / E of 26.4.
While the gains of large tech stocks have boosted the S&P for more than a decade now, their heavy weighting could push the index down if the technology falls out of favor. Microsoft, Apple and Amazon, the three most valued companies on Wall Street, account for nearly 15% of the S&P 500 market capitalization, according to Refinitiv Datastream.
Fund managers in last month’s BoFA global research survey named “long tech” as the most crowded trade in the market and collectively reduced their “overweight” positions in tech stocks to the lowest level since May. The four most crowded individual stocks in the market are Microsoft, Apple, Alphabet and Amazon, according to a recent analysis by research firm Bernstein, incorporating factors such as institutional ownership and price dynamics.
Limiting exposure to technology stocks over the past decade has tended to hurt portfolio performance over the long term, making investors reluctant to reduce their holdings too drastically. Still, some are looking to expand their portfolios to reduce their exposure to the biggest names in the industry.
Garret Melson, portfolio strategist at Natixis Investment Managers Solutions, believes stocks of large technology companies can be vulnerable to investors looking to secure their earnings and move some funds to other sectors. Melton is buying shares of financial and energy companies, which he says will benefit from rising inflation and a strong economic recovery.
âWe are in the camp that the rate of growth of the economy is underestimated this year and next year,â Melson said.
DataTrek Research analysts believe that sectors that can benefit from increasing growth, including financial and energy companies, are likely to challenge big tech stocks until the end of the year.
“Technology has been a winning group for many years, and we expect it to be so in the future,” they wrote in a report on Friday. “But as investors wonder where to allocate capital todayâ¦ we think they will likely look for sectors more exposed to improving economic fundamentals.”
Strong US employment figures on Friday brightened the economic outlook, as did the announcement of a promising investigational antiviral drug from Pfizer. Travel stocks gained as the S&P 1500 Airlines Index climbed 7% on the day. [.N]
Investors will get a snapshot of inflation when US consumer price data is released next week.
Denny Fish, portfolio manager and head of the tech sector at Janus Henderson, said inflation concerns and high valuations in the tech sector had prompted him to seek out smaller companies that would benefit from the growth of the giants. with more crowded stock positions.
Fish is bullish on shares of Australian software development firm Atlassian Corp PLC, whose product management tools “augment” Microsoft’s suite of applications, as well as Canadian e-commerce firm Shopify Inc, which benefits of Amazon’s growth, he said.
âWhat we’re doing is finding emerging companies that have even better growth than giant companies and rational valuations that will outperform over multi-year periods,â Fish said.
Many investors remain bullish on large, tech-focused stocks, citing their strong earnings and history of dynamic growth.
Saira Malik, chief investment officer for global equities at Nuveen, is looking for technology companies that may benefit from rising inflation and that have fallen behind the general market recovery.
She believes shares of Amazon.com Inc, which has been lagging the market with an 8% gain this year, will be one such âcatch-up trade,â fueled by the growth of e-commerce.
âNow is the time to be more selective,â said Malik.