For some context on the unprecedented dominance of the tech sector on the overall market, here is some perspective from BofA’s Savita Subramanian on October returns, when Tech continued to lead the other ten sectors, generating +7.8% on a total return basis. This translates into a whopping 75% of the S&P 500’s return last month!
Furthermore, with virtually every lagging hedge fund rushing to buy the tech sector, chasing such activist central banks as the SNB, the sector’s 24.5% weight in the S&P 500 is now the highest since October 2000.
That said, considering tech companies reported some of the strongest 3Q earnings results, the best revision trends, and rank at the top of BofA’s quant model, is there anything to be concerned about?
According to BofA, the biggest risk is the extreme crowding and positioning by fund managers. As Subramanian expains: “we hear frequently from clients, ‘you don’t want to sell Tech until year end.’ And funds certainly reflect this sentiment: Tech is the most overweighted sector by large cap active managers, displacing Discretionary whose relative weight dropped for the sixth consecutive month.” As noted above, the recent Tech rally means the sector now represents 24% of the S&P 500 index – a post-tech bubble high – and a remarkable 30% of all active fund holdings today, the highest levels in BofA data history since 2008 (Chart 1).
What about other sectors: in addition to Tech, Utilities (+3.9%), Materials (+3.9%), and Financials (+2.9%) outperformed last month. Laggards were generally defensive: Telecom (-7.6%), Staples (-1.4%) and Health Care (-0.8%) underperformed the most, while Energy (-0.7%) was also in the red despite the rally in oil prices.
YTD, Tech maintains its dramatic lead (+37.2%), contributing just under half of the S&P 500’s 16.9% total return, followed by Materials (+20.3%) and Health Care (+19.4%). Telecom (-11.9%) and Energy (-7.2%) remain in the red.
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