Technology stocks, driven largely by gains in semiconductor and computer hardware sectors benefiting from advances in artificial intelligence, have outpaced the broader market by a wide margin in the first half of the calendar year.
Technology stocks have surged 21.5% in the first half of 2024, and now present both opportunities and challenges for investors, according to a note from private wealth management firm Bernstein published Monday.
While the technology sector posted impressive gains, its performance was highly concentrated, with Nvidia (NASDAQ:) alone responsible for a large portion of the outperformance.
Only 30% of technology stocks outperformed the market, the lowest number since 2002, Bernstein said, adding that the concentration clearly points to the narrow nature of technology’s rally.
Meanwhile, valuation concerns are also looming. Technology stocks are currently trading at a 49% premium to the market, close to levels seen during the dot-com bubble and well above historical averages, Bernstein noted.
Bernstein also noted that while the expected growth premium in the technology sector remains above historical norms, driven in particular by the semiconductor sector, high valuations pose risks, especially given the potential AI digestion period and ongoing uncertainty in global markets.
However, the momentum in the technology space continues to be supported by expectations of rising AI adoption rates and a potential economic recovery.
Expected lower interest rates could support growth stocks, including technology, though the risk of overvaluation remains, according to Bernstein.
Bernstein recommended that future investment strategies focus on a balanced approach, adding that investors should maintain their market weight allocation to technology.
She also suggested that investors adopt a balanced strategy between growth-oriented technology stocks and value-oriented stocks. Opportunities may also lie in selectively investing in low-cap names where valuations are more attractive and performance is lagging, she added.