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Tech Stocks Are Overvalued. Where Truist Advises Investing Instead.

Posted on by darion

After a meteoric rise in the value of big tech stocks, valuations could return to normal.

That’s at least the concern of Truist Chief Strategist and CIO Keith Lerner. In a note last Friday, Lerner downgraded the company’s rating on the technology sector from “overweight” to “neutral” as names like Nvidia, Apple and Google continue to propel the sector to its most extreme performance in decades.

Big Tech Valuations Elevated

The stock market is extremely tight, with just a few large-cap technology stocks driving market growth.

Overall, the technology sector is up about 40% since November 2023. That’s about 16 percentage points more than the S&P 500 during the same period. The sector has outperformed the S&P 500 by about 11% over the past month, its highest level since 2002.


Highest monthly technology advantage in the last 20 years

Truist



According to Lerner, tech valuations are overheating in the short term, fueled by investor optimism. The tech sector’s forward P/E has risen 19% since May 1 of this year, jumping from 26x to 31x. These rising valuations appear to be outpacing earnings growth, making it a bad time for investors to buy.

Tech stocks are performing similarly to last year, as seen in the chart below. If they continue on the same trajectory, they will likely pull back in the next few months before bouncing back.


The technology sector will likely slow down soon.

Truist



Neutral, not underweight

But investors shouldn’t worry about the tech bubble. Compared to the peak of the dot-com bubble, when tech stocks outperformed the S&P 500 by 253%, today’s 44% lead seems modest.


The technology industry is not yet a long-term bubble zone.

Truist



Despite the downgrade, Lerner emphasized that Truist remains bullish on the technology over the long term. He believes AI will be a sustainable growth driver for the sector going forward.

Lerner is optimistic that there will be new opportunities in the future to invest in technologies beyond the Magnificent Seven.

“There will likely be a better opportunity to deploy capital wisely and we will look for a better entry point to modernize the sector going forward,” Lerner wrote in the note.

Where to invest in the current market

After taking the technology down, Truist is focused on finding value below market square. Lerner is bullish on Communication services AND tools.

Both sectors are benefiting indirectly from the AI ​​boom. Telecoms companies are taking advantage of government initiatives to invest in the 5G infrastructure needed to train AI models. Utilities have received a boost from rising demand as data centers consume huge amounts of energy.

Investors can gain exposure to these sectors through funds such as the SPDR S&P Telecom ETF (XTL), iShares US Telecommunications ETF (IYZ), Utilities Select Sector SPDR Fund (XLU) and Vanguard Utilities Index Fund ETF (VPU).