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The Tech Sector Soars in 2020

But there are still a few bargains to be had.

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Brian Colello: Technology performed in line with the market in Q4, but has it been a significant outperformer to the broader market in 2020? Over the past 12 months, as of Dec. 7, tech is up 43% year to date versus 18% for the broader market. Over the past three months, again ending on Dec. 7, tech was in line, up 11%, while the broader market was up 12%. And as of Dec. 7, the median technology stock was 19% overvalued, in our view. This continues to be one of the frothiest valuations for the tech sector we've seen since 2007, and we have a handful of names that are at least 40% overvalued versus our fundamental expectations.

Software has continued to do really well in 2020, and it's been minimally affected by COVID. Some tech firms have been countercyclical to the market and have been winners in the work-from-home trend. These are still great businesses, and we think remote working will likely continue to be adopted, which is good news for Zoom, Microsoft, DocuSign, and some others. But the median software stock is still 18% overvalued. And these work-from-home winners like Zoom and DocuSign are some of the most overvalued names that we see in our coverage universe.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.