July 14, 2020 / 3:50 PM / in a month

Crowded trade, high valuations: why investors worry about tech stocks

NEW YORK (Reuters) - Some investors are getting increasingly worried about the outlook for technology and big growth stocks after a massive rally which has pushed the Nasdaq Composite index to record highs despite the coronavirus-inflicted economic damage.

FILE PHOTO: Traders wear masks as they work on the floor of the New York Stock Exchange as the outbreak of the coronavirus disease (COVID19) continues in the Manhattan borough of New York, U.S., May 27, 2020. REUTERS/Lucas Jackson

Few can complain about the performance of the S&P 500 Growth index, whose components range from Netflix Inc to medical device maker ResMed Inc and is up more than 10% for the year to date while the broad S&P 500 remains down 2% over the same time. Instead, investors say the popularity of tech and growth stocks at a time of global economic uncertainty has left their valuations stretched and primed them for a decline.

“Yesterday was a first warning shot for growth stocks and it might take a few weeks for the trade to come undone. Watch for Nasdaq volatility to be compressed as risk is priced out with common sense,” said Sebastien Galy, a senior macro strategist at Nordea Asset Management, referring to a technology sell-off late Monday. “The clock is ticking, significant prudence is warranted.”

The tech-heavy Nasdaq Composite fell 0.5% early Tuesday, while the broad S&P 500 posted small gains, marking the second consecutive day that the Nasdaq underperformed the overall market.

Overall, 74% of global fund managers are long tech stocks, making it the most-crowded trade in the multi-decade history of the Bank of America Merrill Fund Manager survey.

Such lopsided trades often result in subsequent underperformance, a Reuters analysis found. The “best short is tech stocks given positioning and stretched performance,” analysts at the firm noted in a report.

Further economic shutdowns in California, which has seen a surge in coronavirus cases, could also weigh on tech and growth stocks, said Spreadex analyst Connor Campbell.

“California is specifically a tech haven, so this is going to have a disproportionate effect on tech stocks,” Campbell says. “That is the home of American tech, if that spreads further, if lockdown restrictions get tighter in California, then this will eventually get a knock-on effect on those big tech firms.”

An increase in inflation-adjusted interest rates should benefit value stocks at the expense of popular companies such as Amazon.com Inc, Apple Inc and Google-parent Alphabet Inc, said billionaire investor Bill Gross.

“Value stocks, versus growth stocks, should be an investor’s preference in the near-term future,” Gross wrote.

Reporting by David Randall; additional reporting by Kate Duguid and Joice Alves; editing by Megan Davies and Richard Chang

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