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Business News/ Markets / Stock Markets/  ' There’s a lot of complacency': Analysts caution on tech stock rally
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' There’s a lot of complacency': Analysts caution on tech stock rally

Sentiment has grown ever-more bullish of late, a classic contrarian indicator that analysts said should signal caution
  • The S&P 500 information technology index is the biggest percentage gainer among sectors this year, up almost 31%
  • The tech-heavy Nasdaq 100 is up 36% in 2020 (REUTERS)Premium
    The tech-heavy Nasdaq 100 is up 36% in 2020 (REUTERS)

    Technology and Internet stocks have been among the standout performers in 2020, but the scale of their advance has underlined concerns over valuation, suggesting a risk if companies aren’t able to live up to the robust optimism investors have.

    Sentiment has grown ever-more bullish of late, a classic contrarian indicator that analysts said should signal caution. Tech stocks, where valuations have long been in question, have been a focus of this risk.

    “There’s a lot of complacency," said Ted Mortonson, technology desk sector strategist at Baird. “On a scale of 1-10, complacency is at a nine, and meanwhile the fear index is zero."

    Mortonson singled out Coupa Software and Zoom Video Communications as names where the valuation appeared excessive after recent gains. Coupa has more than doubled in 2020, while Zoom has soared more than 530% as one of the most high-profile beneficiaries of the pandemic. However, he also noted that the Philadelphia Semiconductor index was up about 40% thus far this year, as was an exchange-traded fund dedicated to software.

    “You have to be in these names or you’ve massively underperformed," he said in a phone interview. Mortonson added that many tech-adjacent industries would see permanently higher demand as a result of the pandemic, including e-commerce and cloud computing, but that valuations appeared so high that rallies were unlikely to continue. “Institutional investors had a fear of missing out back in April, but now everyone has jumped in the pool."

    BofA Global Research’s November survey of fund managers showed that managers were “the most bullish they’ve been all year," and that cash levels represented 4.1% of portfolios, “a level we haven’t seen since before COVID-19 and close to triggering a ‘sell signal’." Investors who participated in the survey, according to BofA, described being long on tech as “far and away the most ‘crowded trade’."

    The S&P 500 information technology index is the biggest percentage gainer among sectors this year, up almost 31%. It is followed by the 27% advance of the consumer-discretionary index -- which includes such high-flying e-commerce stocks as Amazon.com and Etsy -- and by the 16% rise of the communication-services index, where names like Facebook, Alphabet and Netflix are classified.

    The tech-heavy Nasdaq 100 is up 36% in 2020, while the S&P 500 is up nearly 11%. Much of the S&P’s advance has come in November amid signs of progress for a Covid-19 vaccine.

    Morgan Stanley noted a “dramatic shift in sentiment," which has resulted in an “almost universally bullish view from investors, including retail." Analysts led by Michael Wilson added that it is “very hard to find a bear on 2021," and that the recent rally “appears exhaustive," while the market “seems ripe for another correction."

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    This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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    Published: 24 Nov 2020, 06:08 PM IST
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