The surge in tech stocks' valuation pushed the S&P 500 about 16% higher in the year's first half amid the growing optimism surrounding next-gen generative AI technology.
Tech stocks year-over-year rose 38% in the first half of the year, the best half-year performance in over 20 years, according to Bernstein analysts.
“Tech is now trading at a 54% premium to the market, its highest level in 45 years other than the dot com bubble, and well above its historical average premium of 26%,” the analysts said in a client note.
As a result, they are struggling to recommend Bernstein’s clients to have an overweight position in tech for the coming months. Instead, they say that “stock picking increasingly matters, particularly since the five largest tech companies account for nearly 56% of tech's total capitalization (and the top 2 account for 33%), three of which are at very high relative valuations (95%+) vs. history.”
“Our reluctance to recommend an overweight stems from the sector's combination of historically high valuations but average expected five-year relative growth looking forward. However, we think it is tough to be underweight,” the analysts added, citing several factors including the powerful AI momentum.
Similarly, JPMorgan equity strategists say that stocks aren’t cheap, even without Tech/AI.
“In terms of 12m forward P/E multiple, S&P500 is currently at 19.4x, Tech at 27.3x and non-Tech/AI part, the remaining 65% of the index, at 17.4x. This compares to 15.3x historical median, a 10%+ premium. At the low last October, when recession was the base case for most, S&P500 was trading at 15.3x forward P/E, with Tech at 18.1x and SPX ex Tech at 14.5x,” they wrote in a JPMorgan note sent to clients today.
Overall, JPMorgan analysts see potential for an equities pullback in the second half of 2023.
“FOMO is in full swing, there is complacency being built into stocks with VIX at the lows of its range. All this suggests that, if the activity momentum does weaken in 2H, relative to the current projections of no/soft landing, stocks are unlikely to shrug it off, or look through, as they are not priced for disappointment anymore, even if one is to fully take out the Tech/AI/FAANG groups from the equation,” they concluded.