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Tech's reign over U.S. stock market to be tested in 2021

TechnologyDec 29, 2020 03:35AM ET
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© Reuters. FILE PHOTO: The U.S. flag is seen on a building on Wall St. in the financial district in New York

By Lewis Krauskopf

NEW YORK (Reuters) -Investors are weighing how big to go on U.S. technology stocks in the coming year, as pricier valuations, regulatory risks and a revival of the market’s beaten-down names threaten to dim their allure.

A surge in technology and internet-related shares helped lift U.S. indexes to record highs this year. Gains in Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) alone accounted for more than half of the S&P 500’s 16.6% total return as of Dec. 16, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Tech took a back seat in recent weeks, as hopes of a vaccine-led economic recovery fueled a rally in energy, financials, small caps and other less-loved parts of the market. The Russell 1000 value index climbed 10% since breakthrough vaccine data was announced in early November, compared to a 4% gain in the Russell growth index, which is broadly populated by tech stocks.

Though it is unclear how long the change in market leadership will last, the shift highlights a dilemma that has confronted investors throughout the last decade. Limiting tech exposure has mostly been a losing bet for years and the coronavirus pandemic accelerated trends that stand to benefit the group.

But valuations near 16-year highs are raising concerns about the sector's vulnerability, especially if a U.S. economic reopening creates a sustainable trade in value stocks.

"I think that people are going to stick with their tech exposure but I don’t think there is going to be a lot of fresh money put into tech in the new year," said Lindsey Bell, chief investment strategist at Ally Invest.

The technology sector along with shares of big tech-related companies -- Amazon, Google-parent Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) -- account for about 37% of the market-cap weighted S&P 500, giving them outsized influence on the index's gyrations and investors' portfolios. Fund managers polled by BofA Global Research named "long tech" as the market's most crowded trade for the eighth straight month.

And while tech, which trades at 26 times forward earnings estimates, is one of the few sectors expected to post profit growth in 2020, according to IBES data from Refinitiv, earnings are projected to grow by 14.2% next year, slower than the 23.2% clip seen for S&P 500 companies overall on a potential bounce in growth.

“We continue to believe that this value rotation we started to see over the last few weeks does have legs into 2021 as well,” said Mona Mahajan, U.S. investment strategist at Allianz (DE:ALVG) Global Investors.

Efforts by U.S. and European regulators to curtail the market dominance of companies such as Alphabet and Facebook are another pressure point for the industry.

But plenty of investors are happy to retain holdings in businesses that have proven durable amid slow economic growth, trade conflicts and the global pandemic. Indeed, spikes in uncertainty have tended to send investors into tech stocks in recent months.

"There are very few sectors where you can get as predictable ... growth as you can from technology," said Mark Stoeckle, chief executive officer of the Adams Funds, whose diversified equity fund's top holdings are Microsoft, Apple and Amazon.

Assets in the Invesco QQQ Trust, which tracks the tech-heavy Nasdaq 100 index, this month hit their highest amount on record, Lipper data showed.

Michael Arone, chief investment strategist at State Street (NYSE:STT) Global Advisors, expects the economy to return to slower growth rates after recovering in 2021.

"That suggests you want to own companies (that have) high organic growth rates and can compound cash flow better than others," Arone said.

Even some strategists who like other stocks aren't straying far from tech. BMO Capital Markets cut tech to "market weight" for 2021 but urged investors to maintain positions rather than sell.

"I don’t think we are just going to move away from tech," said Esty Dwek, head of global market strategy at Natixis Investment Managers. "These businesses have become integral parts of our lives."

Tech's reign over U.S. stock market to be tested in 2021

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