Wells Fargo Advises Reducing Exposure to 'Overvalued' Tech Stocks
Wells Fargo is recommending that its clients reduce their investments in technology stocks which they believe are overvalued. According to their analysts, most of the growth this year has come from just a few tech giants.
Narrow Market Rally: The investment bank points out that the current market growth is driven mainly by a small number of large-cap tech and communication services companies. Data from Bloomberg shows that the top five contributors to the index’s return accounted for nearly 58% of its gain through May 31, 2024. This means that the remaining 498 companies contributed slightly more than 42% to the overall return.
Limited Contributors to Gains: “The average return of the top five has been 40.8%, while the rest of the index members averaged less than 5%. Clearly, the rally this year has been very narrow,” Wells Fargo highlighted.
Comparison with Other Indices
Wells Fargo also noted that different market indices have shown varying performances. For example, the Index of small-capitalization companies significantly underperformed compared to the S&P 500 Index. Through May, the small-cap index rose 2.1%, whereas the S&P 500 gained 10.6%.
Additionally, only 36 out of 124 sub-industry groups within the S&P 500 have outperformed the index year-to-date, which further emphasizes the limited breadth of the market rally.
Investment Shift Recommendations
Wells Fargo's analysis shows that a narrow array of stocks is driving the S&P 500 to new heights. They believe that as the economy slows down, it's better to trim overvalued Tech and Communication Services sectors and replace them with undervalued Industrials, Energy, Materials, and Health Care sectors.
