Market Extra: Tech-wreck will signal investors’ disenchantment with stocks
SAN FRANCISCO (MarketWatch)—Investors looking for early warnings signs of a shift in U.S. market sentiment would do well to watch tech and biotech stocks.
That is because a selloff in those sectors is likely to signal that investors’ confidence in U.S. equities is deteriorating, according to Bank of America Merrill Lynch analyst Michael Hartnett
“U.S. bear view requires [a] tech-wreck,” he writes in a report to investors, noting that the market capitalization of tech and biotech stocks is $4.2 trillion, eclipsing the $4.1 trillion market cap of the combined euro area and $3.9 trillion of all emerging markets.
The spectacular rise of tech and biotech names has already set off alarms that they are ripe for a major correction, particularly with both sectors having gained for six years straight between 2009 to 2014.
The information and technology index, which groups together the biggest tech names in the world including Apple Inc. AAPL, +0.85% and Microsoft Corp. MSFT, -1.06% is off 0.3% so far this year but jumped 18% last year. The health-care sector, where biotech stocks are found, is up 5.3% year to date, following a 23% rally in 2014.
But for the time being, another meltdown similar to the dot.com collapse isn’t likely soon.
“Although price is reminiscent of the tech bubble, valuation tells a different story,” Goldman Sachs’s chief U.S. equity strategist David Kostin said in early March.
The same holds true for biotechs.
It might look like a bubble but it isn’t, according to analyst Ravi Mehrotra at Credit Suisse. Rather, he believes the sector’s blistering pace of gains can be attributed to fundamental changes in the industry.
On the whole, Hartnett sees investors becoming more risk-averse in the second quarter, while the U.S. dollar’s reversal is expected to trigger bear-market rallies in commodities, resources and emerging market assets.
“Without doubt the key Q2 call is can the U.S. economy recover its mojo,” he said, adding that BAML is projecting the economy to expand by more than 3.5% in the quarter.
If BAML’s prediction hits the mark, the possibility of the Federal Reserve raising interest rates between June and September will come into greater focus, Hartnett said.
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Market Extra: Tech-wreck will signal investors’ disenchantment with stocks
