The Price of Ignoring Tech Stocks

US Mutual Funds Underperform on Shunning Tech Stocks 

US Mutual funds are paying a hefty price for shunning tech plays. Concerned by deteriorating economic conditions and the US Federal Reserve hiking the benchmark rate at the fastest pace in decades, most fund managers stayed clear of tech stocks. Unfortunately, the defensive play has come to bite, with tech stocks spearheading a ferocious rally of the market amid solid bullish bets.

Tech Stocks Ferocious Rally

Tech-heavy Nasdaq 100 is already up by more than 24%, outperforming the S&P 500, which is only up by about 9% and posting its best start to a year since 1998. The rally in the tech space has mostly been fueled by increased investor interest in technology companies betting big on artificial intelligence technology. The frenzy around artificial intelligence has helped investors shun any concerns about deteriorating economic conditions.

Only a third of the US mutual funds have been able to match the gains posted by the US benchmarks compared to the industry average of 38%. Currently, most funds are 15% points underweight the performance of big tech plays, including Apple, Microsoft, Tesla, Amazon, Meta Platforms, Nvidia and Alphabet, which are behind the ferocious rally in the market.

Nevertheless, the outperformance being experienced in the overall US equity market has been influenced by a small group of companies. Investors have been going long companies that are doing exceedingly well amid the high-interest rate environment. Consequently, most have been ramping up positions in companies that have posted stellar quarterly earnings results.

In addition, investors have been shunning cyclical industries that are susceptible to deteriorating economic conditions. As a result, companies that rely on non-essential products have seen their revenue base take a significant hit, affecting earnings as investors remain tight-lipped on their cash amid the high inflation levels and the ever-growing risk of recession.

Strategists Warnings

Mutual funds resorted to cheaper plays at the start of the year, staying clear of defensive and growth sectors amid growing concerns of economic recession. For example, most opted to stay clear of tech plays on concerns their operations and long-term prospects would be hurt significantly by the FED hiking interest rates and the economy plunging into recession.

While the recession risk is still in play, retail and institutional investors have shunned the concerns opting to pump more investment capital into tech plays and growth stocks. As a result, investors have generated significant returns even as warning bells become the order of the day on Wall Street. Now may be the best time to lock in some profits if concerns raised by Wall Street strategists are anything to go by.

Strategists from Morgan Stanley and JPMorgan have warned that the market remains overstretched at current levels. Technical indicators are already shouting oversold conditions as the strategists warn the market has rallied against deteriorating fundamentals and technicals.

Likewise, most tech plays are less attractive at current levels compared to the start of the year. The elevated valuations mean investors would be chasing trades on investing at current levels as it becomes clear a potential correction could come knocking before another leg higher.

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