Monday, May 17, 2021 06:32 AM
By Elena Popina
(Bloomberg) –Sentiment toward technology stocks has been souring for months now. Yet few analysts have told clients to get rid of the group entirely, and instead are sticking with a neutral or a slightly bearish view. However, Ned Davis Research strategists finally pulled the trigger, cutting the group to the equivalent of a sell rating.
• Technology stocks, which have traded sideways since mid-February, are due to succumb to mounting inflation pressures, strategists including Rob Anderson said. Since the early 1970s, the group has underperformed the S&P 500 by 3.6 percentage points annually whenever a CPI print posted a year-over-year jump of 3.9% or more. Data last week showed inflation spiked 4.2% over the 12 months through April.
• Another issue is valuations that remain stretched. Measures like price-to-forward-earnings or price-to-sales are at least one standard deviation above the long-term average relative to the S&P 500 — and at a time when this year’s growth in operating earnings is expected to come in at 35%, well below the S&P 500’s 52%, calculations by Ned Davis Research show.
• “The ongoing recovery should continue to support Value over Growth sectors,” the firm’s strategists said in a note last week. “High expectations,” particularly in stocks like Microsoft and Apple, “leave little room for missteps.”
• Six months ago, the firm’s strategists cut the sector to neutral, just as the group was in the middle of its first quarterly underperformance relative to the S&P 500 since 2018. A period of weakness followed, driven by concerns about everything from tapering to taxation to elevated positioning in the sector to valuations above long-term averages.
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