Tech Stocks Cut at Jefferies, Bernstein After Epic 2019 Rebound

(Bloomberg) -- Two Wall Street strategists downgraded technology stocks, saying this year’s market-leading rally has stretched valuations to extremes and is unlikely to last.

Sean Darby, chief global equity strategist with Jefferies, lowered his view on the industry to modestly bearish, citing concern that tech shares have run ahead of fundamentals. Noah Weisberger at Sanford C Bernstein & Co. reduced his rating to market-weight from overweight, saying the industry is “unjustifiably rich.”

The downgrades come after tech stocks soared 23 percent this year, defying a deteriorating earnings picture. The group has beaten all other major S&P 500 industries as investors keep chasing winners. The Nasdaq 100 Index has advanced in all but one of the 15 weeks since Christmas, and now sits less than 1 percent away from its peak reached in August.

Amid the buoyant stock prices, however, is a darkening profit backdrop that Jefferies says investors may be forced to acknowledge when companies start reporting first-quarter results. The outlook has worsened to levels not seen since at least 2012, according to the firm’s model that tracks factors such as new orders and capital spending to predict future earnings trajectory.

“The equity markets may have become a tad too excited about a strong profit revival,” Darby wrote in a note to clients. “The market might be underwhelmed by the forthcoming earnings results.”

Information technology companies in the S&P 500 are expected to report an 8.7 percent drop in first-quarter profit, according to estimates compiled by Bloomberg. Earnings are being pinched as products such as smartphones have entered a maturing phase and parts makers such as semiconductor companies have seen weak demand from a range of end markets including data centers.

Still, investors haven’t been deterred. They’re willing to pay a premium that’s close to the highest since 2000. At 4.4 times sales, tech stocks trade at a multiple that is twice as high as the rest of the market.

The stretched valuations make tech shares particularly vulnerable in an environment when broad economic growth is slowing, according to Bernstein. The downgrade is part of a broader strategy to reduce exposure to cyclical stocks, “particularly given that YTD cyclical leadership has been stronger than what a slowing economic environment would usually support,” Weisberger wrote in a note.

His other changes in sector recommendations include:

• Downgrades industrials to underweight from market-weight
• Upgrades consumer discretionary to market-weight from underweight

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Richard Richtmyer, Brendan Walsh

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