Tech ETFs Retreat: Pullback Ahead?

June 14, 2017

Volatility may still be restrained when it comes to the stock market, but it's made a sudden re-emergence in at least one key sector. Technology stocks were pummeled on Friday, and then again on Monday, after some analysts questioned whether valuations for the group may have become too stretched.

The $17.6 billion Technology Select Sector SPDR Fund (XLK) dropped more than 3% over the two-day period, bringing its year-to-date return down to 15.6%. Even after the decline, tech—which makes up almost 23% of the S&P 500 by market capitalization—is still the best-performing sector of the year.

But in light of the latest move, some are now pondering whether there is more room to go on the downside―and if so, whether the broader stock market will come along for the ride.

 

YTD Return for XLK

 

Analyst Warnings

In that camp is Bank of America, which recently warned that tech may be trading at its highest P/E multiple relative to the broader market since the 2000 internet bubble. BofA also said that large-cap active fund managers are the most overweight on the sector they have ever been, a signal that tech stocks may have gotten ahead of themselves.

"Based on EV/Sales, which would not be impacted by accounting differences such as the inconsistent treatment of stock-based compensation—a large expense for many Tech companies that we estimate could understate Tech's current P/E by as much as 10%, Tech trades at its highest relative multiple since the Tech Bubble, and is trading well above average even when excluding the Tech Bubble," wrote the bank in a report from earlier this month.

Bank of America isn't the only one. In the past few days, Goldman Sachs got investors chattering after it released a pair of reports highlighting the big run-up in tech stocks.

 

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