Rich valuations test investors’ love for tech

It’s greed versus fear all over again as investors revisit long-standing dilemma

Rich valuations test investors’ love for tech

The U.S. equity market has hit new highs, thanks mainly to a small group of technology and communication stocks that have been years-long drivers of market gains. While there are no signs of the tech sector stopping anytime soon, the phrase “quit while you’re ahead” may come to mind for some investors.

A recent analysis by research firm Bernstein found that Microsoft, Amazon, Facebook, Visa, and Mastercard represent the U.S. equity market’s most crowded individual stocks, reported Reuters. Data from S&P Dow Jones Indices, meanwhile, indicates that more than 20% of the S&P 500’s total 2019 returns were generated by Apple, Microsoft, Facebook, and Amazon.

“Fund managers in a Bank of America Merrill Lynch report in December tagged technology stocks as the market’s ‘most crowded’ trade,” Reuters said.

As the market’s performance becomes concentrated among a handful of leaders, those companies’ rich valuations and overstretched conditions have prompted some to consider the possible consequences of a sudden reversal in risk appetite.

“I think most investors… are going to be very surprised by how much risk is in their portfolios when you do get an environmental shift,” Damien Bisserier, partner at Advanced Research Investment Solutions, told the news outlet. Bisserier’s firm has trimmed its exposure to the stock market, reallocating more assets toward healthcare royalty funds or private real estate investments.

The decision to trim stock exposure isn’t easy. Many who’ve done it ended up hampering their portfolio’s long-term performance, and the reasons to do so — worries over global growth, trade, and a no-deal Brexit — appear to be receding.

On the other hand, most analysts don’t see the S&P 500 staging a repeat of its record gain last year, as some central banks have decided to roll back their easing policies. In a recent poll of 52 strategists in late November, Reuters found a median forecast of 3,260 for the index by the end of this year — not far off from its recent close of 3,275.7.

Stretched valuations in the tech sector is another cause for concern. Refinitiv data indicates that the S&P 500 information technology sector trades at a 12-month forward price-to-earnings ratio of 21.53, compared to 18.26 for the broader market index.

That’s not to mention the recent lull in volatility, reflected by the S&P 500’s 59-day streak without a one-day move of 1% in either direction as of Thursday. According to Reuters, it has been more than a year since the last time the stock market saw such a long stretch of stock-market serenity.

“The last such period of calm stretched from June through October 2018 and ended with a flare-up of trade tensions that shaved 5% from the S&P in a two-day span,” the news outlet said.