Tech stocks have risen this year, and their massive weight on the S&P 500 has helped propel the index to a record 25.1 percent gain in 2021.
Some investors are concerned that valuations could escalate into uncharted territory. For instance, Alphabet, Google’s parent company, trades with a 12-month price-to-earnings ratio of 26.6, compared to a valuation of 21.1 for the S&P 500.
Applese values 26.2 of future earnings, while the information technology sector, which is up nearly 28 percent this year, maintains a future PER of 26.4.
Although gains from big tech stocks have powered the S&P for more than a decade, its heavyweights could sink the index if the tech falls out of favor.
The three most valuable companies on Wall Street
Microsoft, Apple y AmazonThe three most valuable companies on Wall Street account for about 15 percent of the S&P 500’s market capitalization, according to Refinitiv Datastream.
Fund managers named “longs in technology” as the busiest trade in the market in the survey of BoFA Global Research last month, and collectively reduced their “overweight” position in tech stocks to its lowest level since May.
The four most in-demand stocks are Microsoft, Apple, Alphabet and Amazon, according to a recent analysis by research firm Bernstein, which incorporates factors such as institutional ownership and price drive.
Limiting investments in technology stocks over the past decade has hurt long-term portfolio performance, causing investors to be cautious about drastically slashing their holdings.
Still, some are looking to expand their portfolios to cover their exposure to the biggest names in the industry.
Garrett Melson, Portfolio Strategist, Natixis Investment Managers Solutions, he believes that stocks in big tech companies may be vulnerable to investors looking to lock in earnings and shift some funds to other sectors.
Melton is buying shares in financial and energy companies, which he believes will benefit from rising inflation and a strong economic recovery.
“We are in the field that this year and next the growth rate of the economy is going to be appreciable,” said Melson.
Datatrack Research Analysts They believe sectors benefiting from increased growth, including financial and energy companies, are likely to challenge big tech stocks by the end of the year.
“Technology has been a winning group for many years, and we hope it will continue to be so in the future,” he wrote in a report on Friday. “But as investors consider where to allocate capital today… we think they will look to riskier areas to improve fundamentals.”
Employment data supports the market
Strong US employment figures on Friday improved the economic outlook, as did news of a promising experimental antiviral drug from Pfizer. Travel stocks gained, with the S&P 1500 Airlines Index up 7 percent on the day.
Investors will know inflation when US consumer price data is released next week.
Denny Fish, Portfolio Manager and Head of Technology at Janus Henderson, said that concerns about inflation and high valuations of the technology sector They have led him to seek smaller companies that benefit from the growth of the giants with more crowded stock positions.
Fish is bullish on the shares of the Australian software development company Atlassian Corpwhose product management tools “augment” Microsoft applications, as well as Canadian e-commerce company Shopify, which is benefiting from Amazon’s growth.
“What we’re doing is finding startups that have better growth than the giant companies and rational valuations that will outperform over a period of several years,” said Fish.