Tech Stocks: BofA Says Don’t Catch the Falling Knife
The sector remains risky, as Bank of America analysts cautioned against purchasing the dip in tech equities, despite the recent selloff.
The Information Technology sector is currently trading at a “record EV/Sales” ratio, which suggests that valuations are still elevated, despite the recent downturn, according to BofA.
The bank underscores that technology equities are “cyclical, not secular,” indicating that they are closely associated with economic fluctuations.
This cyclical nature, in conjunction with the impending modifications to Standard & Poor’s index-cap rules, introduces what BofA refers to as “concentration risk” for mega-cap tech stocks. This raises concerns about passive selling, which could further burden these names, according to the investment bank.
In other aspects, BofA’s comprehensive outlook underscores volatility in the short, medium, and long term. According to reports, the “Regime Indicator” of the bank has recently transitioned from a “Upturn (buy risk)” to a “Downturn (sell risk)” signal, which serves to reinforce the cautious approach to sectors that are driven by growth, such as technology.
According to BofA: “Quality, stability and income have protected investors in prior volatile markets.”
Furthermore, BofA is more optimistic about defensive sectors, including Utilities and Real Estate, in contrast to technology. They observe that these sectors provide more consistent dividends and inflation protection.
Utilities, which have been referred to as the “tortoise” of the market, have generated total returns that are consistent with the Nasdaq’s “hare” over the long term. Citing the attractive dividend yield and protection from inflation, the bank is increasing Utilities to overweight.
In general, BofA advises against purchasing the technology dip, as defensive sectors provide a more consistent opportunity and growth equities continue to encounter headwinds.
