US tech is not heading into bubble territory – UBS

FXStreet reports that tech stocks have rallied this year, with the tech-heavy Nasdaq up over 20% vs. a 2% gain for the S&P 500. While economists at UBS don't think tech is entering bubble territory, they do think investors with a concentration in the biggest recent winners should rebalance and reposition that exposure.

“The information technology (IT) sector currently trades at 25x consensus forward EPS estimates, a 17% increase from the beginning of the year. However, using the tech-heavy NASDAQ composite as a proxy, valuations are clearly well below late 1990s levels, when the index forward P/E rose above 70x at the height of the dotcom bubble. Furthermore, the IT sector looks appropriately valued relative to other sectors given current expectations for future cash flows and discount rates.”

“After the significant outperformance of growth in general and FAAMNG in particular, many investors' portfolios may be heavily skewed towards recent outperforming stocks. For example, the top five companies in the S&P 500 (Facebook, Amazon, Apple, Microsoft and Alphabet) now account for over 20% of the index. This doesn't necessarily mean that these stocks should be sold, and we still like most of the FAAMNG complex. But it does mean that portfolios may be less diversified and therefore more risky (both on the upside and downside) than they might seem. In addition, investors that have too much exposure to these growth stocks could be at risk if value stocks start to assume market leadership.”