The rally in technology stocks, driven largely by gains in the semiconductor and computer hardware sectors benefiting from advances in AI, has outpaced the broader market by a significant margin in the first half of the calendar year.
Technology stocks have risen 21.5% in the first half of 2024 and now present both opportunities and challenges for investors, according to Bernstein Private Wealth Management’s note published on Monday.
While the technology sector has posted impressive gains, performance has been highly concentrated, with only Nvidia (NASDAQ:) accounting for a substantial portion of the outperformance.
Only 30% of tech stocks have outperformed, which is the lowest since 2002, Bernstein said, adding that the concentration clearly points to the limited nature of the tech rally.
At the same time, there are also major concerns about valuation. Technology stocks are currently trading at a 49% premium to the market, near the level of the dot-com bubble, and well above historical averages, Bernstein said.
Bernstein also pointed out that while the expected technology growth premium remains higher than historical norms, mainly driven by the semiconductor sector, elevated valuations pose risks, especially given the potential for a period of AI digestion and lingering uncertainties on the global markets.
However, momentum in the technology continues to gain support with expectations of increasing AI adoption and possible economic recovery.
Lower expected interest rates could further boost growth stocks, including technology, although the risk of overvaluation remains, Bernstein said.
Bernstein advised that investment strategies should focus on a balanced approach going forward, adding that investors should maintain a market weighting in technology.
It also suggested that investors adopt a barbell strategy between growth and value-oriented technology stocks. There may also be opportunities in selective investing in SMID capitalizations, where valuations are more attractive and performance has lagged, the report said.
