Truist trims technology to neutral near-term levels amid massive sector growth

Truist downgraded its rating on the technology sector (SP500-45TR0)(XLK) to neutral from overweight on Friday after the group’s surge against the S&P 500 (SP500)(SPY).

Keith Lerner, chief market strategist at Truist, said the technology has gained about 40% since the overweight sector in November 2023, which means a better result than the S&P 500 index (SP500)(IVV) by approximately 16 percentage points.

“While we continue to be positive about the technology in the long term, in the short term the sector appears broadened and we will not chase the sector,” Lerner said in a note.

“The downgrade is simply intended to highlight that the risk-reward ratio of our work is less attractive in the short term,” he said. “There will likely be a better opportunity to leverage capital significantly and we will look for a better entry point to modernize the sector in the future.”

Tech’s (XLK) month-over-month relative outperformance was recently close to 11%, hitting its highest level since 2002, he said. The recent outperformance was largely due to rising valuations and “optimistic sentiment,” he said. “Indeed, since May 1, the tech sector’s P/E has increased from 26x to 31x (~19% increase),” Lerner said.

Shares of Nvidia (NVDA) are leading the AI ​​investment trend, with the AI ​​chipmaker’s value up 156% this year. Alphabet (GOOG) (GOOGL), Meta (META) and Microsoft (MSFT) also rose in their AI innovation prospects.

Lerner said the tech sector appears to be far from bubble territory and that secular trends around artificial intelligence will persist.

Truist remains overweight in Communications (XLC), Utilities (XLU), and underweight in Consumer Discretions (XLY) and Real Estate (XLRE).

Other technology ETFs include: (QQQ), (SMH), (SOXX), (VGT).