Tech sector has ‘a false sense of security’ and is vulnerable, Morgan Stanley says

Tech sector has ‘a false sense of security’ and is vulnerable, Morgan Stanley says

Tech shares rose in tempo with the broader market Monday, forward of what’s anticipated to be a comparatively robust earnings season, however Morgan Stanley is beginning to see leaks within the sector’s fuel tank.

Tech shares on the S&P 500 index

SPX, +0.88%

rose zero.eight% whereas the broader index completed up simply shy of a zero.9% acquire. Much of the drag on the tech sector got here from shares of Twitter Inc.

TWTR, -5.38%

which fell 5.four% after a report of account suspensions. For the yr, the S&P 500’s tech sector has gained almost 14% whereas the broader index has superior four%.

Those days of robust efficiency are numbered, Morgan Stanley mentioned in a be aware headed by fairness strategist Michael Wilson. The analysts downgraded the tech sector to underweight from equal weight, Morgan Stanley’s second downgrade for the sector this yr, amid a rising quantity of crimson flags for the sector.

“In our experience, rolling bear markets are not over until they have touched every last corner, with the highest quality areas often coming under pressure at the end,” the be aware mentioned. “Given its exceptional growth and quality characteristics, Tech has been a holdout to date.”

“However, we suspect it will not be immune from the changing attitudes toward risk assets we are seeing across markets and think the sector may have benefited from a false sense of security the past few months,” Morgan Stanley famous. “When we hear things like Tech is no longer cyclical or Tech is a low vol/risk sector now, we cannot help but think its vulnerability has reached a concerning place.”

Read: Morgan Stanley downgraded another hot sector Monday

Already priced into tech valuations are an anticipated robust earnings season, the agency mentioned. In the approaching weeks, tech sector earnings are expected to grow by 25% over the year-ago interval, with double-digit progress from subsectors reminiscent of web software program and providers; semiconductor and semiconductor gear; know-how , storage and peripherals; IT providers; and software program.

That progress has pushed price-to-earnings ratios for the following 12 months to ranges which might be effectively above the remainder of the S&P 500.

“These are not bubble valuations like in the late 1990s, but we think it more likely we revert to the near term mean than move higher from here,” in accordance with Morgan Stanley.

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Add to that the uncertainty created by U.S. tariffs and retaliatory tariffs and tech is not trying so engaging. Tariffs are an issue for tech as “perhaps no sector in the global economy has benefited as much from low trade barriers as Tech,” Morgan Stanley mentioned, so anticipate outlooks to be very cautious from the tech sector this earnings season.

In what Morgan Stanley sees as a preview of the broader sector, the agency factors to the chip sector’s latest efficiency, which dropped significantly in June, main the chip sector to show in its first quarterly decline in nearly three years. Chip stocks fell under pressure again simply earlier than the Fourth of July vacation after a Chinese court docket blocked gross sales of sure Micron Technology Inc.

MU, +2.03%

 chips, however most analysts played down the development.

In different tech indicators, the tech-heavy Nasdaq Composite Index

COMP, +0.88%

 has superior 12% on the yr, whereas the PHLX Semiconductor Index

SOX, +0.66%

 and its exchange-traded fund, the iShares PHLX Semiconductor ETF

SOXX, +0.64%

are up about eight.5%.

In different ETFs monitoring the tech sector, the Technology Select Sector SPDR ETF

XLK, +0.76%

is up 12% for the yr, whereas the SPDR S&P Semiconductor ETF

XSD, +0.71%

 is up eight%, the iShares North American Tech-Software ETF

IGV, +0.51%

 has surged 23%, the First Trust Dow Jones Internet ETF

FDN, +0.86%

 has rallied 31%, the First Trust Cloud Computing ETF

SKYY, +0.88%

has risen 20%, and the First Trust Nasdaq Cybersecurity ETF

CIBR, +0.33%

 has gained 17%. All these ETF completed zero.three% to zero.9% increased Monday.

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