3 Reasons Tech Stocks May Continue To Struggle

So far in 2021, the Vanguard Value Index Fund ETF VTV is up 17.4% nearly double the year-to-date return of the Technology Select Sector SPDR Fund XLK.

Over the past decade, periods of time in which tech stocks have lagged value stocks have been short and sweet, but LPL Financial said there are at least three reasons why tech may no longer be leading the market higher for the foreseeable future.

• First, many tech stocks that thrived during the period of social distancing and remote working will face extremely difficult comps and report growth slowdowns in the next several quarters. At the same time, value stocks in the industrials, materials and energy sectors that struggled during the shutdowns will experience the tailwinds of pent-up demand from the reopening.
• Second, the tech sector’s current forward earnings multiple of 25 is relatively high compared to its historical average. In addition, the Russell 1,000 Growth Index is currently valued at a 60% premium to the Russell 1,000 Value Index, its highest premium in the past 20 years.
• Third, the technology sector appears to be rolling over from a technical standpoint. The sector has lagged the S&P 500 since the beginning of September, suggesting technology’s momentum has stalled out.

Related Link: 2 Reasons To Stay Overweight On The Financial Sector

“It’s tough not to like technology given the strong fundamentals and rapid pace of innovation from many tech companies,” LPL Equity Strategist Jeffrey Buchbinder said Tuesday. “But we expect cyclical value sectors like financials, industrials, and materials to fare better the rest of the year as the economy gets a reopening jolt.”

Benzinga’s Take: Just because tech stocks are no longer leading the market higher doesn’t mean investors should dump all their tech holdings for value stocks. There will still certainly be outperformers within the tech sector that are among the largest gainers in the market in 2021, but the easy money that has come from investing in the sector as a whole in the past decade may be much harder to come by in the next several quarters.