Deutsche Bank upgraded global technology stocks to overweight after a sharp selloff and a retreat in investor positioning. The bank argues that much of the concern around AI demand is already reflected in valuations.
Deutsche Bank upgraded global technology stocks to overweight after a sharp market selloff improved the sector's risk-reward profile. Strategists led by Parag Thatte and Chief Strategist Binky Chadha say a retreat in investor positioning helped, and that valuations already reflect much of the AI demand concern.
Tech lags the broader market
Mega-cap growth and technology stocks underperformed the rest of the S&P 500 by more than 16 percentage points over three weeks, the strategists said. The technology group fell 11% during the period, while the remainder of the S&P 500 gained almost 6%.
As a result, relative performance dropped to the bottom of its decade-long trend channel, according to the bank.
Positioning resets to neutral
Investor positioning has also retreated from elevated levels to neutral, bringing exposure closer to an anticipated earnings growth rate of around 10%. That compares with earnings growth of about 47% in the third quarter and consensus expectations of 36% by the end of next year.
Previous rotations back into technology delivered an average gain of 32%, outperforming the rest of the S&P 500 by 30 percentage points. The broader benchmark also gained an average 16% over the three months following those rotations.
Earnings strength reaches beyond tech
Deutsche Bank also pointed to continued strength in corporate earnings outside technology. Technology and energy account for approximately three-quarters of expected third-quarter S&P 500 earnings growth of 31%, yet growth excluding those sectors remains 12%.
The median S&P 500 company is expected to deliver growth of 14.4%, close to a two-decade high outside recessionary rebounds.
Risks remain
The bank acknowledged risks from potential technology regulation following the US midterm elections and further geopolitical escalation. However, it argued that equity and oil markets had already priced in substantial uncertainty, with oil prices approximately 65% above its estimate of medium-term fair value.
Deutsche Bank said the correction created a more attractive entry point, although further downside remained possible in the event of another major external shock.
Source: Investing.com
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