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Truist downgraded its rating on the Technology sector (SP500-45TR0)(XLK) to neutral from overweight on Friday following a sharp run-up by the group against the S&P 500 (SP500)(SPY).
Keith Lerner, chief market strategist at Truist, said Technology has gained about 40% since it overweighted the sector in November 2023, an outperformance of the S&P 500 (SP500)(IVV) by about 16 percentage points.
“Although we still have a favorable long-term view of Technology, on a shorter-term basis the sector appears extended, and we would not be chasing the sector,” Lerner said in a note.
The “downgrade is simply meant to highlight that the risk/reward in our work from a shorter-term perspective is less attractive,” he said. “There will likely be a better opportunity to deploy capital in a meaningful way, and we will be looking for a better entry point to upgrade the sector in the future.”
Tech’s (XLK) relative outperformance on a one-month basis was recently near 11%, reaching the most extreme since 2002, he said. The most recent outperformance has been largely fueled by an expansion in valuations and “optimistic sentiment,” he said. “Indeed, since May 1, the tech sector’s forward P/E has jumped from 26x to 31x (~19% increase),” Lerner said.
Nvidia’s (NVDA) stock has been at the fore of the artificial intelligence investment trend, with the AI chipmaker up +156% this year. Alphabet (GOOG)(GOOGL), Meta (META) and Microsoft (MSFT) have also shot higher on prospects for their AI innovation.
Lerner said the Tech sector appears far from bubble territory and that secular tailwinds will persist around AI.
Truist is still overweight the Communication Services (XLC) sector, Utilities (XLU) and underweight Consumer Discretionary (XLY) and Real Estate (XLRE).
Other tech ETFs include: (QQQ), (SMH), (SOXX), (VGT).