Investors eye Big Tech as stock market wobbles
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[October 05, 2021] By
Lewis Krauskopf
NEW YORK (Reuters) -Technology stocks are
bearing the brunt of a recent market selloff, putting a spotlight on how
an extended downturn in the sector could weigh on broader equity
indexes.
After Monday's sharp drop, the S&P 500 technology sector is down 6.7%
since the overall S&P 500 closed at a record on Sept. 2, compared with a
5.2% decline for the broader index over that time.
The tech-heavy Nasdaq Composite, meanwhile, is down 7.3% from its Sept.
7 closing high, getting closer to marking a 10% correction.
The tumble comes amid a cluster of worries that hit markets in recent
weeks, including a looming unwind of the Federal Reserve's easy money
policies, a jump in Treasury yields and a nasty battle among lawmakers
over the U.S. debt ceiling.
Many investors are hesitant to cut their exposure to technology-focused
stocks, which have led markets for most of the last decade and are
expected to deliver strong earnings growth even if the economic climate
worsens. Previous dips over the years have often been met by furious
buying.
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Still, a heavy weighting in broader indexes, comparatively elevated
valuations and wide ownership have led some investors to worry over the
repercussions of a prolonged period of underperformance for tech and
tech-related names.
Here are a few of the metrics investors are studying as they weigh
whether to stay the course in tech or pare back their holdings:
A CROWDED TRADE
Years of solid performance have made tech stocks a mainstay in
portfolios across Wall Street, periodically spurring concerns that they
may be susceptible to violent market swings if investors try to sell all
at once.
Facebook, Amazon, Microsoft and Google-parent Alphabet have ranked among
the top five most popular hedge fund long positions for the past 15
consecutive quarters, a study by Goldman Sachs showed.
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![](../images/100521PIX/2021-10-05T051944Z_1_LYNXMPEH9406C_RTROPTP_4_USA-STOCKS_small.JPG)
A Wall St. street sign is seen near the New York Stock Exchange
(NYSE) in New York City, U.S., September 17, 2019. REUTERS/Brendan
McDermid
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At the same time, 40% of fund managers surveyed by BofA Global Research
in September said buying U.S. technology stocks was the market's most
crowded trade, a designation tech stocks have received for three
straight months.
WEIGHTING IN THE S&P 500
The tech sector by itself holds a 27.7% weighting in the S&P 500, more
than twice that of the number two sector, healthcare. Adding four
tech-related companies that are in other sectors -- Alphabet, Amazon,
Facebook and Netflix -- boosts that weighting to 38.8%
VALUATIONS
The technology sector trades at 25.8 times forward 12-month earnings
estimates, compared with 20.7 times for the overall S&P 500, according
to Refinitiv Datastream.
While growth and technology stocks have typically commanded greater
valuations in recent years, some market participants worry that the
category's reputation for delivering gains year after year has helped
stretch their prices beyond levels that may be justified by
fundamentals.
EARNINGS
The tech sector's earnings held up much better than those of the broader
market last year as the coronavirus pandemic wreaked widespread economic
havoc. As the world emerges from lockdowns this year, tech's profit
growth has not been quite as strong as S&P 500 companies overall.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard
Pullin)
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