Are Investors Too Overweight Tech Stocks?

According to a Bank of America fund manager survey, investors are the most overweight they have been in the technology sector since December 2021, with 60% of respondents saying being long big tech as the most crowded trade.  A Bank of America analysis of Q2 filings shows that 20% of stock funds had more than 40% of their assets in the seven biggest technology companies.  The seven stocks accounted for 29% of active funds’ weight in S&P 500 companies, 150 basis points higher than their weight in the index. 

Investors have been flocking into technology stocks as growth in both earnings and revenue is expected to outpace the overall market next year.  However, this week’s weakness in Apple (AAPL) and its suppliers due to China’s ban on iPhone use in government-backed agencies and state companies are questioning if recent strength in the sector can continue.  BNP Paribas said, “Where tech goes is going to be where the U.S. equity market goes.  Tech has shown such strong leadership that if it rolls over, it’s going to be very, very challenging for the market to perform.”

The excitement this year over artificial intelligence (AI) and signs that the Federal Reserve was nearing the end of its tightening campaign helped push the Nasdaq 100 Stock Index ($IUXX) (QQQ)  to a +39% gain in the first half of the year.  However, the market backdrop has become less friendly, with the trouble with Apple and rising Treasury yields threatening the tech sector’s sky-high valuations.  As a result, the Nasdaq 100 is virtually flat so far in the third quarter.

The elevated valuations of technology stocks suggest that investors may have become overly confident in the sector.  The Nasdaq 100 trades at 24 times estimated earnings, above its 10-year average of 21, while Apple, Microsoft (MSFT), and Nvidia (NVDA) all trade at premiums to both their own historical averages and the market overall.  Truist Advisory Services said long-term bets on tech make sense, but crowding and other near-term concerns have caused them to turn neutral on the technology sector.

Some analysts are concerned that a bubble may be forming in technology stocks.  Last week, UBS Wealth Management said that relative to the multiple of the S&P 500 Stock Index ($SPX) (SPY), the tech sector’s price-to-earnings ratio stands at “its highest level since the global financial crisis.”  The recent plunge in Apple could be a warning of the overextended valuations in technology stocks.  Interactive Brokers said, “When the largest company is facing restrictions in a major economy, that is a giant headwind, and it should force investors to reassess valuations.” 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.