January 23, 2022

Tech sector dominance of the U.S. stock market to be challenged in 2021

Will tech stocks end their bull run in 2021? | Charts that Count

Tech sector dominance of the U.S. stock market to be challenged in 2021The dominance of the tech sector in the US stock market will be challenged in 2021

Investors are weighing how much more U.S. tech stocks will gain in value in the coming year as higher valuations, regulatory risks and a resurgence of collapsed high-profile players threaten to weaken their appeal.

The rise in technology and internet stocks helped lift US indices to record highs this year. According to Howard Silverblatt (Howard Silverblatt), Senior Index Analyst S&P Dow Jones Indices, Apple, Amazon and Microsoft alone accounted for more than half of S total profits&P 500 at 16.6% on December 16.

Technology has taken a back seat in recent weeks as hopes of a vaccine-assisted recovery have fueled rallies in energy, finance, small-caps and other less-favored parts of the market. The Russell 1000 Value Index is up 10% since the vaccine breakthrough data was announced in early November, up from a 4% gain in the Russell Growth Index, which is largely driven by technology stocks..

While it is unclear how long the market leadership change will last, the shift underscores the dilemma investors have faced over the past decade. Limiting the impact of technology has been largely a losing bet for years, and the coronavirus pandemic has amplified trends that could benefit the technology group.

But estimates close to 16-year highs raise concerns about the sector’s vulnerability, especially if the opening of the US economy leads to sustained trading in value stocks..

«I think people will stick to their technology positions, but I don’t think there will be a lot of fresh money invested in technology in the new year.», – said Lindsay Bell (Lindsey Bell), Chief Investment Strategist, Ally Invest.

The tech sector, along with shares of large tech companies – Amazon, Google Alphabet and Facebook – account for about 37% of the market capitalization-weighted S&P 500, which gives them a huge impact on index fluctuations and investor portfolios. Fund managers interviewed by BofA Global Research named «Big tech» the most traded stocks on the market for the eighth month in a row.

And while tech, trading at 26x forecasted profits, is one of the few sectors to see profit growth in 2020, according to IBES data from Refinitiv, profits will grow 14.2% next year, down 23.2%. % in general for the companies included in S&P 500, indicating potential growth retardation.

«We continue to believe that this value rotation, which we have begun to observe in the last few weeks, does indeed hold its promise in 2021.», – said Mona Mahajan (Mona Mahajan), US Investment Strategist at Allianz Global Investors.

Efforts by US and European regulators to curb market dominance by companies such as Alphabet and Facebook are further pressure on the industry..

But many investors are happy to retain their stakes in companies that have proven themselves in the face of slow economic growth, trade conflicts and the global pandemic. Indeed, spikes in uncertainty in recent months have tended to drive investors to invest in tech stocks..

«There are very few sectors where the most predictable … technology-driven growth can be achieved», – said Mark Stokle (Mark Stoeckle), CEO of Adams Funds, whose diversified stock portfolio is dominated by Microsoft, Apple and Amazon.

According to Lipper, Invesco QQQ Trust’s assets, which track the high-tech Nasdaq 100 Index, hit their highest ever level this month..

Michael Aron (Michael Arone), chief investment strategist at State Street Global Advisors, expects economy to return to slower growth following recovery in 2021.

«This suggests that you want to own companies (which have) high organic growth rates and can increase cash flow better than others.», – said Aaron.

Even some strategists who like other stocks don’t stray far from technology. BMO Capital Markets downgraded technology valuation to «market weight» by 2021, but urged investors to maintain positions, not sell.

«I don’t think we’ll just give up technology», – said Esti Dweck (Esty Dwek), Head of Global Market Strategy, Natixis Investment Managers. «These businesses have become an integral part of our lives».