Why overcrowding in tech stocks is still risky
Favoring large-cap technology stocks proved a winning strategy during the recent bout of volatility that sent the stock market into correction. But the risk of a crowded trade, one that could be ripe for reversal, in tech remains, according to analysts at RBC Capital Markets. The S&P 500 SPX, +1.18% has recovered more than half of the losses from the correction earlier this month, when it dropped more than 10%. The benchmark index is up 3.4% since the start of the year, trading near 2,765. The much-beloved tech sector — up nearly 9% year to date — accounted for more than 60% of those S&P gains. Over the past 12 months, the S&P 500 is up 16.4%, while the tech sector gains are more than double that at 35%
In fact, mega-tech names including @Microsoft CorpMSFT, +1.45% @Apple Inc. AAPL, +1.98% @Netflix Inc.NFLX, +2.88% @NVIDIA Corp NVDA, +0.26% and @Alphabet Inc. GOOG, +1.51% contributed the lion’s share, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indexes.
@Amazon.com AMZN, +1.46% technically a consumer discretionary company but often lumped in with tech, gained nearly 30% since the start of the year and contributed nearly a fifth of all the gains on the S&P 500, according to Silverblatt. So-called FAANG stocks, including Amazon, all hit intraday records (though they did not close at all-time highs) on Friday, an event that many technical analysts see as a bullish signal.
Read: Big Tech shake-up — three stocks to buy and three to sell
Solid performance of the sector is one of the main reasons why these stocks continue to be popular with both the sell-side analysts and buy-side managers.
According to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, sell-side analysts still overwhelmingly recommend buying tech stocks.
“Net ‘buy’ ratings (the percent of technology sector buy ratings less the percent of S&P 500 buy ratings) remain extremely high relative to history, though not quite back to tech bubble peaks,” Calvasina wrote in a note to investors.