The technology sector represents around $13 trillion in market capitalization, accounting for about 36% of the top 1500 stocks and 40% of the S&P 500, Bernstein analyst A.M. (Toni) Sacconaghi, Jr lists.
Tech stocks have experienced their most robust half-year performance in over 20 years, with a 38% appreciation year-to-date, outperforming the broader market by 2350 basis points on a cap-weighted basis.
Tech's outperformance has been driven by multiple expansions, with over 100% of the returns coming from increased valuations rather than earnings growth.
The six largest tech companies (Apple Inc
The top 10 tech stocks account for two-thirds of the sector's market cap among the top 1500 stocks and 76% of the S&P 500 tech index, indicating a high concentration level.
Despite negative earnings per share (EPS) revisions for most of the largest tech companies, their stocks have performed strongly, contributing to tech's relative outperformance.
Growth stocks have outperformed value stocks in the broader market, but the outperformance of growth in the tech sector has been less pronounced.
Tech stocks are trading at a 54% premium to the market, the highest level in 45 years, indicating high valuations.
It is ideal to have a market-weight allocation to tech in the second half, with stock selection becoming crucial due to the concentration of market performance among a few large companies.
Opportunities are available in quality growth names likely to meet expectations and select value names, as both cohorts have underperformed the broader tech universe year-to-date.
The historical performance suggests that the most vital contributors to concentrated markets tend to underperform in subsequent periods, emphasizing the importance of selective profit-taking.
A balanced approach should exist between inexpensive value names and high-quality beaten-down tech names, with opportunities identified in both categories.
