Tech stocks rally, which is largely driven by gains in semiconductor and computer hardware sectors benefiting from AI advancements, has outpaced the broader market by a significant margin in the first half of the calendar year.
Tech stocks have surged 21.5% in the first half of 2024, and now present both opportunities and challenges for investors, as per Bernstein Private Wealth Management’s note published on Monday.
While the tech sector has recorded impressive gains, its performance has been highly concentrated, with Nvidia (NASDAQ:NVDA) alone accounting for a substantial portion of the outperformance.
Only 30% of tech stocks have outperformed, marking the lowest figure since 2002, said Bernstein, adding that the concentration clearly points out the narrow nature of the tech rally.
At the same time, valuation concerns loom large as well. Tech stocks are currently trading at a 49% premium to the market, nearing levels seen during the dot-com bubble, and well above historical averages, noted Bernstein.
Bernstein also pointed out that while tech's expected growth premium remains higher than historical norms, driven particularly by the semiconductor sector, elevated valuations pose risks, especially considering the potential for an AI digestion period and ongoing uncertainties in global markets.
However, the momentum in tech is receiving continuous support with expectations of rising AI adoption and potential economic recovery.
Lower anticipated interest rates could further buoy growth stocks, including tech, though the risk of overvaluation persists, as per Bernstein.
Bernstein recommended that investment strategies going forward should focus on a balanced approach, adding that investors should maintain a market-weight allocation to tech.
It also suggested investors adopt a barbell strategy between growth and value-oriented tech stocks. Opportunities may also lie in selectively investing in SMID cap names where valuations are more attractive and performance has lagged behind, it added.