RBC swaps overweight in technology stocks for healthcare, citing concerns of a market pullback of up to 10% Between them, information tech (39%) and communication services (9%) make up almost half the S&P 500, whereas health care has just a 9% weighting via Combining the information technology and communication services sectors, tech stocks comprise almost half of the S&P 500. So when a strategist downgrades the sector from overweight to market-weight and swaps the exposure to healthcare, investors should pay attention —because it doesn’t happen very often. It’s a contrarian call: the latest global fund manager survey compiled by Bank of America found that investors said they were more overweight on tech than any other sector.
Lori Calvisana is global head of equity strategy at RBC Capital Markets s Lori Calvasina, head of U.S. equity research at RBC Capital Markets, switched horses as the markets enter the fourth quarter? The switch is motivated by strong outperformance of tech stocks since mid-July, which has led to a deterioration in the “valuation signal” Calvasina is picking up for the sector. Going back to the late 1980s, RBC finds that the sector is now “slightly above average” on both an absolute and relative median price-to-earnings ratio.
Video 91/1 Skip Ad Continue watching after the adVisit Advertiser websiteGO TO PAGE What's next for SpaceX as more shares enter the market and capex jumpsSee All Videos What's next for SpaceX as more shares enter the market and capex jumps Play video: What's next for SpaceX as more shares enter the market and capex jumps When RBC upgraded the sector back in July, the sector was reasonably valued, but that’s not the case today, Calvasina argues. She also checked out the price-to-earnings ratio against the post-COVID era and still finds it “pricey.” She points out that fund flows toward global developed market tech funds have weakened recently and that earnings upgrades for semiconductor stocks are decelerating. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it.
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Calvasina observes, however, that tech outside of the United States still looks appealing on performance, valuation and demand metrics. Macro factors have also influenced RBC’s thinking on the downgrade. The strategy team remains concerned about the possibility of a 5% to 10% pullback in the S&P 500 and notes tech stocks tend to lag in pullbacks triggered by previous Fed hiking cycles.
Moreover, RBC detects a slight shift in global investment flows away from the U.S. and toward Western Europe. When this trend has emerged in the past, U.S. growth stocks —usually this means tech — tend to underperform. sector has negatively correlated with tech, making it, therefore, a natural destination when dialling down exposure on the latter. RBC analysts find improving flows, a positive earnings revision trend and decent valuations all favoring healthcare.
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