- Tech stocks, favored for their earnings growth, are underperforming more-defensive utilities stocks.
- The weakened ratio of both sectors reflects a softening in investors’ growth outlook.
The recent sell-off in tech stocks suggests investors are thinking about growth differently.
The returns of the S&P 500’s technology sector have more than doubled the benchmark index’s over the past year. In contrast, utilities — a defensive sector that investors like for its indifference to the economic cycle and regular dividend payments — fell nearly 3% over the same period.
A ratio of both sectors now shows a reversal that hasn’t been this sharp in years.
The ratio of tech versus utilities stocks is a metric tracked by Jim Paulsen, the chief investment strategist at Leuthold Group.
He told Bloomberg last week that the ratio’s rollover resembled the pattern seen as the dot-com bubble expanded in the late 1990s. Paulsen observed that trading behavior was repeating itself — investors were flocking to all the popular tech stocks while shunning “conservative alternatives” like utilities.
But that has recently switched amid a slew of news that has given investors worry about big tech companies. Notably, regulators are scrutinizing Facebook’s use of private data on its platform, while Tesla’s getting slammed after a downgrade from Moody’s and an investigation into a fatal crash involving one of its cars.
Put differently, the popular momentum strategy of chasing market winners on the way up has slowly started to unravel.
Right on cue, Bank of America Merrill Lynch’s March fund-manager survey released last week found that investors were “stubbornly long” global stocks, banks, and tech stocks while betting against bonds and defensives.
They also said that the most crowded trade was “long FAANG + BAT” — betting on the growth of the largest US and Chinese tech companies (FAANG is Facebook, Apple, Amazon, Netflix, and Google, while BAT refers to Baidu, Alibaba, and Tencent).
Here’s David Rosenberg, Gluskin Sheff’s chief economist, writing on Tuesday’s market action after the New York Stock Exchange’s FANG+ Index suffered its largest one-day drop (emphasis ours):
“The sector rotation also is very fascinating. Growth stocks are now rolling over in a material way and the forced selling out of ETFs will compound the situation. The FAANG stocks are really getting hit, as are the once high-flying semiconductor stocks. All in, the S&P 500 Tech sector got clobbered yesterday, the Financials slid 2% and Consumer Discretionary dropped 1.9%. But not only did the uber-defensives outperform, but were positive on an otherwise brutal day! The Utilities soared 1.5%. Telecom rallied 0.5%. And Staples eked out a 0.1% gain.
“Utility stocks outperformed Transports by an incredible 320 basis points — in a clear sign that the stock market is downgrading its growth outlook. Small Caps sagged 2%. Not encouraging signposts for those trading the market from the bullish side.“