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Home>UPDATE: Both market and tech's gains are broader than appreciated, analyst says

UPDATE: Both market and tech's gains are broader than appreciated, analyst says

UPDATE: Both market and tech's gains are broader than appreciated, analyst says

10/02/2017

By Ryan Vlastelica

"Another reason to embrace the equity market rally," Morgan Stanley writes

Many U.S. investors are likely feeling both grateful for, and skeptical of, the technology industry, the sector that has contributed most of Wall Street's 2017 gains, but which is also the poster child for stretched valuations (http://www.marketwatch.com/story/as-internet-stocks-hit-records-familiar-questions-about-bubbles-arise-2017-05-22).

These concerns may be understandable, according to Morgan Stanley, but they are also misguided.

Technology has been the standout of the year, up more than 26% thus far in 2017, the best performance of any of the primary S&P 500 sectors, easily surpassing the 19.5% gain of health care in second place. (The Technology Select Sector SPDR ETF (XLK), which has a different composition than the S&P 500 information technology sector but which is the most popular way for investors to get exposure to the group, is up 22.6% year to date.)

Not only has the industry gained more than any other, but the rally has been particularly robust in a select number of large-capitalization stocks like Apple (AAPL), Facebook (FB), and Google-parent Alphabet (GOOGL), names that are among the largest stocks on the market, and which investors and managers are more likely to be overweight on (http://www.marketwatch.com/story/tech-stocks-are-single-handedly-helping-active-managers-outperform-2017-05-26). The so-called FAANG stocks, a quintet of major technology names (along with Amazon.com (AMZN) and Netflix (NFLX), two consumer-discretionary stocks (http://www.marketwatch.com/story/did-you-buy-a-tech-etf-to-cash-in-on-amazon-heres-some-bad-news-2017-06-16) that often move on technology trends), have by themselves contributed a sizable portion of the overall market's advance this year (http://www.marketwatch.com/story/a-quarter-of-sp-500s-2017-climb-due-to-five-stocks-yes-those-five-2017-07-27).

The strength in these names has also created anxiety, as investors fear a turn in them could spiral out to the broader market.

Tech weakness seems "to create an outsized amount of worry among investors with whom we speak," wrote Michael Wilson, chief U.S. equity strategist at Morgan Stanley. It is "probably the sector that has caused the greatest degree of worry about the sustainability of the overall equity rally we have seen since the February 2016 lows as investors have a misperception that it has been almost only tech driving market returns."

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