Wall Street is seeing a mass rotation from high-growth technology stocks into value stocks this week, leaving technology investors to wonder whether the sector is experiencing a short-term correction or something more sinister.
At this point, the market move seems to be more about valuation concerns rather than underlying business weakness.
The downturn in the technology sector began a week ago when Goldman Sachs analyst Robert Boroujerdi said outperformance by a handful of mega-cap technology stocks created a “valuation air pocket” in the market.
Boroujerdi singled out five stocks – Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Microsoft Corp. (MSFT) and Alphabet (GOOG, GOOGL). Together, these companies have delivered a major portion of the market growth over the past eight years. Incredibly, the five companies collectively account for nearly 13 percent of the weighting of the entire Standard and Poor’s 500 index.
In the week since Boroujerdi’s note, all five stocks are down between 2.6 and 7.1 percent and have weighed on the overall market. The Nasdaq composite index is now down 2.5 percent, while the Dow Jones industrial average is up 0.6 percent in the past five trading sessions. At the same time, popular value stocks such as General Electric Co. (GE), Johnson & Johnson (JNJ) and Wal-Mart Stores (WMT) have been among the top performers in the S&P 500.
Keith Lerner, chief market strategist at SunTrust, says growth investors should stay the course for now.
“We are not advising a style tilt at this point,” Lerner says. “On a short-term basis, value’s underperformance is moving to an extreme and due for a reprieve.”
Other analysts believe mega-cap tech stocks may have finally exhausted their positive momentum.
Canaccord Genuity analyst Michael Graham says Facebook, Amazon, Netflix (NFLX) and Google’s share prices have risen too far too fast.
“We believe simply that these four stocks represent a large portion of the growth opportunities within large cap tech, and six months ago all the valuations were quite reasonable,” Graham says. “We still largely believe in the growth, but the valuations are a bit less obvious.”
If the underlying growth environment for the technology sector persists, long-term investors may simply need…
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