Professional investors are sending a warning sign on tech stocks that helped push the U.S. stock market back into a bull market.
Respondents to the September Bank of America Fund Managers Survey specifically flagged the tech sector as a danger sign for stocks that have seen dramatic gains from the lows of the March 23 pandemic. Managers also highlighted their shifting portfolio allocations in light of these concerns.
BofA’s global survey, which was conducted the week to September 10, polled 224 fund managers with $646 billion in assets under management. The survey provides insight into investor thinking a week after the Nasdaq 100 selloff that left market participants in doubt about the sustainability of the rally.
The gains in U.S. stocks over the past six months have been primarily driven by a group of mega-cap tech and internet companies known as FAANG, which flourished as lockdowns boosted demand for online services.
Fears of overvaluation have driven the tech selloff. Among the stock market’s biggest tail risks, concerns about a tech bubble are now ranking second after another wave of COVID-19. Some 80% of fund managers say U.S. technology stocks are the world’s most crowded trade in the survey’s history.
Laffer Tengler Investments chief investment officer Nancy Tengler thinks institutional investors need to return to the market for stocks to recover :
I think we need to have institutional investors stepping back in. I think what you’ll see here is once we get through the noise of the election, we get some of the Robinhood traders back to work and the options trading dies down modestly I think what you will find is investors are looking at fundamentals. These are the best companies in the U.S. economy.
Tech companies have soared too high too fast. A correction to remove some of the froth is healthy. Tech stocks are still expensive, so we could see further declines in the coming weeks.
As investors get wary of tech stocks, they are looking to other sectors, especially industrials, according to the survey. This sector, down almost 4% year-to-date, is at its highest overweight position among managers since January 2018.
Managers have reduced their positions in healthcare and large-cap stocks and focused more on small caps. They have increased cash allocations and are betting against energy.
Despite all the market volatility this year, fund managers remain largely optimistic about the economy and stocks.
They believe the recession that started in February is already over and 58% now say a legitimate bull market has begun.
Ed Clissold of Ned Davis Research says we’re in a bull market. Watch the video below:
Investors are the most optimistic about corporate earnings since 2011, with 47% expecting global corporate profits to grow 10% or more in the next 12 months. Yet, only a net 18% of managers are overweight stocks, which BofA strategist Michael Hartnett called “far from dangerously bullish.”
Only 39% of surveyed fund managers expect a vaccine in the first quarter of 2021, and 61% predict U- or W-shaped recovery. They would need to be more optimistic than this to buy more stocks. Fund managers would be more bullish if a vaccine comes out sooner than expected or if the recovery ramps up.
Pfizer CEO Albert Bourla says it’s “likely” the United States will deploy a COVID-19 vaccine to the public before the end of the year–a move that could drive the stock market higher.