How Expensive Are Tech Stocks? Very.
Investors,
Technology stocks are at new all-time highs relative to long-term Treasuries (as measured via XLK/TLT), which isn’t something that we’d expect to see in light of ongoing macro risks.
In fact, it’s the exact opposite of what we’d expect to see given that the 2nd and 3rd largest bank failures occurred within the past four weeks. While the relationship of XLK/TLT was choppy throughout 2022, it remained in an upward trajectory and continued to make higher highs and higher lows. Interestingly, we can see that the relationship of XLK/TLT made new all-time highs multiple times in 2022; however, each of these “breakouts” would immediately reverse. Technicians refer to these as “failed breakouts”. With the latest re-acceleration & breakout, there might be reason to take some profits at current levels and not get too greedy.
It’s become common knowledge that recent market momentum is being pushed higher by mega-cap technology stocks, but this chart helps to highlight another major point: investors haven’t reduced their appetite for high quality risk assets, relative to “risk less” assets.
Let’s contrast this takeaway against the chart below, tracking ARKK relative to Treasuries (ARKK/TLT) over the same time period:
This chart indicates that investors haven’t indiscriminately been buying risk assets, as they’ve clearly avoided the riskiest of risk assets relative to “risk less” assets. Hence why I provided a conditional statement in the initial takeaway to focus on high quality risk assets. For example, consider the top 10 holdings in XLK (followed by their weighting within the ETF):
Microsoft ($MSFT): 23.83%
Apple Inc. ($AAPL): 22.8%
Nvidia ($NVDA): 4.86%
Broadcom ($AVGO): 3.54%
Cisco Systems ($CSCO): 2.83%
Salesforce Inc. ($CRM): 2.63%
Accenture ($ACN): 2.38%
Adobe Inc. ($ADBE): 2.34%
Texas Instruments ($TXN): 2.23%
Advanced Micro Devices ($AMD): 2.11%
Notice the key themes? Large-cap tech, semiconductors, and SaaS.
In the remainder of this report, I’ll be highlighting a variety of important charts specifically focused on technology stocks. After a monumental rally to start the year, with the Nasdaq-100 gaining +20.5% in Q1 2023, I think all investors are debating whether or not they should chase tech stocks higher or exercise patience and let the market come to them. Today’s report will help to break this question down.