Investors really hate tech stocks right now— but should they?

Brian Sozzi
·Executive Editor
3 min read
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In this article:

There is no love for hot tech stocks right now, but strategists say eventually that will change because commonsense says it should change.

Nevertheless, the lack of love for tech is growing palpable as positions are slashed amid the rise in 10-year yields and a rotation into value stocks.

Fund managers cut their tech weighting to the lowest overweight position since January 2009, according to a new survey out this week from Bank of America. The survey found that while 34% of fund managers view being long tech as a crowded trade, the figure is sharp decline from the 80% polled in Sept. 20.

The somewhat bearish assessment of tech on the Street reflects noticeable sell-offs in proven tech winners this past month.

The NYSE FANG+ Index — which tracks the performance of household name tech stocks such as Facebook, Apple and Tesla —has dropped 8% since hitting a record closing high on Feb. 17. Some individual tech sell-offs have been more jarring. Tesla shares are down 13% inside of a month, Salesforce is off 14% and Zoom has shed 24%.

"At the core of the lingering tech bear thesis, high flying tech stocks are crowded names with broken technicals and no traditional valuation support," opines Wedbush tech analyst Dan Ives, who adds what traders are witnessing is a "painful, brutal valuation digestion period."

Painful indeed.

Bullish bias in tech

But there are longer term positive catalysts in play for tech stocks that could return to focus soon given cheaper valuations, strategists point out. The most obvious is the ongoing shift to the cloud. It's a transition that is only likely to intensify with corporate budgets loosening up post-pandemic and a pivot to hybrid workforces.

"Today we estimate 35% of workloads are on the cloud with a doubling of workloads on the cloud expected by 2023 across the enterprise landscape on an eye popping trajectory. While valuations will continue to be an emotional bull/bear debate, the fundamental growth on the horizon for these next generation technologies is unprecedented as this 4th Industrial Revolution begins to take hold," Ives contends.

The bears are out on tech stocks.
The bears are out on tech stocks. (Bank of America)

Ives is particularly bullish on DocuSign, ZScaler, Microsoft, Salesforce and Nuance as plays on the move to the cloud.

Meanwhile, a historical look at tech valuations and economic growth support a bullish bias in tech names over a longer period of time.

"Since 1947, the annualized excess outperformance of the technology sector has been 2.7% greater (i.e., 3.4% versus 0.7%) when real GDP growth was above average compared to when it was below average," points out The Leuthold Group chief investment officer Jim Paulsen.

Paulsen — a long-time market historian — doesn't stop there in trying to make his case for tech.

He adds, "Since 1950, tech stocks have thrived when the 10-year bond yield has been lower than 5%, beating the overall market by a 5.8% annualized pace and outpacing 61% of the time. For all quarters since 1947 when bond yields have increased, Tech stocks outperformed on average at a 4.9% annualized clip while trailing the overall stock market by an average annualized 1.8% during quarters when yields declined."

So hang in there tech investors — time and fundamentals are on your side.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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