By Lewis Krauskopf
NEW YORK (Reuters) – Investors are tiptoeing back into shares of U.S. tech stocks following a sharp tumble, even as some still-elevated valuations threaten to punish dip buyers if markets stumble again.
After a searing rally this year, the tech-heavy Nasdaq 100 is down more than 13% from an all-time high hit last month in a sell-off that has been blamed on everything from U.S. economic worries to the unwinding of a global yen-funded carry trade.
The sell-off has made tech stocks less expensive based on price-to-earnings ratios, boosting their allure to investors who had previously been reluctant to jump aboard. The S&P 500 tech sector recently traded at 26.1 times expected 12-month earnings estimates. That compares with 31.3 in July, which had been its highest level since 2002, according to LSEG Datastream.
Still, even bullish investors are proceeding with caution. While valuations have edged lower, the tech sector still trades well above its 10-year average of 20.7. Its 32% valuation premium over the broader S&P 500 is more than twice as wide as it has been over the last decade.
Those valuations could make the sector vulnerable to future turbulence. Mixed earnings from some of the biggest names – including Google parent Alphabet and Microsoft – and legendary investor Warren Buffett’s Berkshire Hathaway selling of half its Apple stake are among other reasons traders are treading lightly.
“I’m not going all-in, but I’ve done some buying,” said Robert Pavlik, senior portfolio manager at Dakota Wealth. He has started adding to some tech positions in recent days after paring holdings in companies including Nvidia, Broadcom and Amazon.com at the start of July.
“I don’t think the outlook has changed for any of these companies,” he said.
Red flags for megacap stocks abounded last month: the technology sector reached its highest price-to-earnings ratio in more than two decades, while owning the “Magnificent 7” – the group of huge stocks including Nvidia and Apple – was deemed the most crowded trade for a 16th straight month, according to a BofA Global…
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