Hedge funds deepened their bearish wagers against technology companies, betting the pain is just getting started for this year’s worst stocks.
As computer and software makers led the market carnage last week, professional speculators sold the shares at the fastest pace in more than five years, driven entirely by shorts, prime broker data compiled by Goldman Sachs Group Inc. show. A similar trend played out at Morgan Stanley, where bearish positions among hedge fund clients jumped the most this year, led by tech stocks.
Sentiment is souring toward what were once the market’s darlings. Beloved last year because of their ability to cater to stay-at-home demand during pandemic lockdowns, tech is now under threat as the economy reopens and corporate profits bounce back for everyone from banks to automakers.
Another bear case holds that rising Treasury yields will make the sector’s rich valuations harder to justify. The Nasdaq 100’s multiple of 26 times forecast earnings may be the lowest in 12 months, but that doesn’t mean it’s low by historical standards -- or cheap enough to keep short sellers away from an industry that’s already this year’s worst performer.
Even after the latest selloff, the Nasdaq 100 trades at a P/E premium to the S&P 500 that’s above the 10-year average.
“We still don’t think the pain in big tech is done,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “Eventually, attractive valuations seem likely to bring buyers back to the space given strong fundamentals, but that condition simply hasn’t materialized yet.”
Skepticism over tech stocks has grown in recent months, allowing hedge funds to pick back up a strategy that was all but left for dead in the wake of the meme-stock mania. While stocks have recovered from the most recent rollover, sellers seem to emerge with every bounce. On Friday, when the Nasdaq 100 rallied more than 2%, the biggest exchange-traded fund tracking the benchmark saw $1 billion of outflows.
Professional investors are turning more cautious on the sector. At Goldman Sachs, fund clients held the lowest tech exposure since last November relative to the market. When compared with the past five years, their positioning was lower than 98% of the time.
In Bank of America’s monthly survey of money managers, released Tuesday, tech allocation stood at an all-time low while money flowed to stocks seen as benefiting more from the economic rebound, like banks.
“Cyclical rotation continued in May,” BofA strategists led by Michael Hartnett wrote. “Pessimism on tech has increased.”