(Bloomberg) -- Last year, a handful of large-cap tech stocks were responsible for most of the valuation expansion in the sector. A different pattern is playing out this year.
High flyers like Amazon.com Inc. and Nvidia Corp. are still handling most of the sector’s outperformance, but what is different this year is that the 10 biggest companies on average are seeing their earnings multiples shrink. It was “primarily the non-FANG stocks that became more expensive,” Bernstein analysts including Toni Sacconaghi said in a research note.
On a market cap-weighted basis, the earnings multiples of the 10 largest tech companies in the sector have contracted by 2 percentage points this year, data from Bernstein’s quant team show. At the same time, the sector’s broad-based multiple expansion in 2018 has pushed the sector to trade at 1.18 times the market’s price to forward earnings, the highest among its industry peers.
Still, the sector that has advanced 11 percent this year compared with a 2 percent gain in the broader market is a buying opportunity to Bernstein. The bias is now toward value over growth.
“For the first time in years, tech has become meaningfully more expensive,” the analysts said. “We continue to recommend both a modest overweight in tech and a balanced barbell between growth and value… although our bias is to add selectively to the value side of the barbell.”
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