Bank of America was out with their latest survey of fund managers this week.
The results? Three out of four of the 210 fund managers surveyed say going long U.S. tech and growth stocks is the most “crowded trade,” and at 74%, it’s the highest reading ever in the monthly survey.
Investors have been piling into familiar names like Google-parent Alphabet (NASDAQ: GOOGL, GOOG), Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Microsoft (NASDQ: MSFT), and Tesla (NASDAQ: TSLA), while the tech-heavy Nasdaq Composite has seen 27 record finishes so far this year.
Crowded or not, fund managers are still overweight the tech sector and the trade shows little sign of slowing down.
But one strategist warns that now’s the time for investors to get cautious on highflying tech and growth stocks.
Sebastien Galy, senior macro strategist at Nordea, said this week that the decline in the Nasdaq seen on Monday followed by some recovery in the index on Tuesday “is a shot across the bow that we have crossed the Rubicon, past the valley of common sense into the river of hope to the forest of make believe. When optimists start to worry, it is time for proper hedging and we upgrade our caution on growth stocks.”
Galy also noted that the market is seeing a limited number of investors trade amongst themselves, “helped by fast money betting on momentum much as a wave slowly building until it crests and collapses. At first, each correction is seen as a unique opportunity to buy into the dream of say Tesla, and there are indeed Googles and Amazons so that the madness has some rationality to it. One should dare, and they do.”
However, Galy went on to say that valuations right now are so “disconnected from reality, that so many growth stocks paint a picture of the future that is impossible as the attrition rate is actually quite high. Euphoria is typical for any such investment and is only a concern when it becomes a sense of panic of missing a dip. Another warning sign is when conservative investors finally move into growth stocks in large size.”
The strategist then warned that while improving economic data should help sustain the “fairy tale disconnected with reality,” investors should prepare for waves of mild corrections until a bigger move lower, possibly be September or October.
“When this happens, one will likely find that growth stocks stay somewhat expensive as they are the hope for the renewal of an old economy,” Galy said, adding that the market may soon start to discriminate more.
“Dare then, prudence now,” Galy concluded.
Galy isn’t the only one who smells a bubble.
Jefferies Global Equity Strategist Sean Darby said this week that tech stocks are poised for a pullback and that circumstances look similar to the dotcom bubble in 1999 – 2000.
“The usual suspects for a pullback in IT share prices aren’t present yet – a shift upward in the U.S. yield curve, a strong dollar, widening credit spreads,” Darby wrote, adding that “the very tight correlations between the [mega-cap tech] stocks alongside rich valuations and modest overbought conditions leave little room for mistakes. Sentiment is starting to become euphoric, similar to the ‘Four Horsemen’ during the late 1990s.”
Darby noted that the market from 1999 – 200 was similarly dominated by a handful of big stocks, including Cisco Systems (NASDAQ: CSCO), Microsoft, and Oracle (NYSE: ORCL). He sees a strong similarity between the market back then and what’s happening now, with big tech stocks “making a similar trajectory as previous bubbles.”