Crowded trade, high valuations: why investors worry about tech stocks

By David Randall

NEW YORK (Reuters) - Some investors are getting increasingly worried about the outlook for technology and big growth stocks after a massive rally which has pushed the Nasdaq Composite index to record highs despite the coronavirus-inflicted economic damage.

Few can complain about the performance of the S&P 500 Growth index, whose components range from Netflix Inc to medical device maker ResMed Inc and is up more than 10% for the year to date while the broad S&P 500 remains down 2% over the same time. Instead, investors say the popularity of tech and growth stocks at a time of global economic uncertainty has left their valuations stretched and primed them for a decline.

"Yesterday was a first warning shot for growth stocks and it might take a few weeks for the trade to come undone. Watch for Nasdaq volatility to be compressed as risk is priced out with common sense," said Sebastien Galy, a senior macro strategist at Nordea Asset Management, referring to a technology sell-off late Monday. "The clock is ticking, significant prudence is warranted."

The tech-heavy Nasdaq Composite fell 0.5% early Tuesday, while the broad S&P 500 posted small gains, marking the second consecutive day that the Nasdaq underperformed the overall market.

Overall, 74% of global fund managers are long tech stocks, making it the most-crowded trade in the multi-decade history of the Bank of America Merrill Fund Manager survey.

Such lopsided trades often result in subsequent underperformance, a Reuters analysis found. The "best short is tech stocks given positioning and stretched performance," analysts at the firm noted in a report.

Further economic shutdowns in California, which has seen a surge in coronavirus cases, could also weigh on tech and growth stocks, said Spreadex analyst Connor Campbell.

"California is specifically a tech haven, so this is going to have a disproportionate effect on tech stocks," Campbell says. "That is the home of American tech, if that spreads further, if lockdown restrictions get tighter in California, then this will eventually get a knock-on effect on those big tech firms."

An increase in inflation-adjusted interest rates should benefit value stocks at the expense of popular companies such as Amazon.com Inc, Apple Inc and Google-parent Alphabet Inc, said billionaire investor Bill Gross.

"Value stocks, versus growth stocks, should be an investor's preference in the near-term future," Gross wrote.

(Reporting by David Randall; additional reporting by Kate Duguid and Joice Alves; editing by Megan Davies and Richard Chang)