Stocktake: Tech stocks are back in fashion

Sector’s price-sales ratio has been driven to levels not seen since the 2000 dotcom bubble

After underperforming for much of 2021 so far, technology stocks are back in fashion.

Last week, Apple's market capitalisation topped $2.5 trillion for the first time, helping the Nasdaq hit new all-time highs. And it's not just Apple. Long technology is once again the most crowded trade in global markets, according to Bank of America's latest monthly fund manager survey.

This enthusiasm has driven the tech sector’s price-sales ratio to levels unseen since the 2000 dotcom bubble. That poses risks for all investors, cautions Morgan Stanley’s Lisa Shalett, because technology now accounts for over 35 per cent of the S&P 500’s market capitalisation. Consequently, the S&P 500’s price-sales ratio is now 50 per cent higher than in 2000.

Tech fundamentals are strong, but increased regulation, rising corporate taxes and higher input costs represent obvious headwinds. If those headwinds “come to fruition”, says Shalett, “the broader market will be at risk”.