According to BofA Global Research, investors remain concerned about Russia, but the S&P 500 index has modest exposure to the country, while technology dominates its weighting.
“The fate of tech is far more important to the S&P 500 than geopolitics,” BofA Equity and Quant strategists said in a note on Tuesday. “S&P’s direct Russia sales risk is 0.1%”
The S&P 500, which closed in correction territory on Tuesday amid fears of another Russian invasion of Ukraine and a sharper move by the Federal Reserve this year, is still heavily on the technology side. BoFA strategists said in the note that the weight of the sector is close to a record low of 28%, “even with the correction of tech since December,” and is just 1 percent below recent highs.
BofA Global Research Report dated 22 February 2022
Highly-valued, high-growth tech stocks have been hit hard this year as the Fed moves to raise its benchmark interest rate to zero this year, as such equities are considered vulnerable to rate hikes. Stocks of companies with projected future profitability are particularly sensitive to higher rates, which are used to calculate the present value of those expected future cash flows.
Information technology plus communications services, a sector also known by BofA strategists as “tech media telecom,” makes up more than 40% of the S&P 500, their note shows. Within Tech he said he favors companies with “healthy” free cash flow relative to their enterprise valuations.
The strategists wrote, “The worst strategy is techniques that are in the process of derating, which end up purging or ‘dead money’ and underperform until rock-bottom valuations are reached.” “Today, tech is in ‘growth purgatory’ rather than ‘fuck cheap, buy everything’ tech overall.”
The comp of the tech-heavy Nasdaq Composite Index, according to FactSet, is a 1.64% loss so far this year, up more than 14%, deeper than the decline posted by the S&P 500 SPX, +2.24% and the Dow Jones Industrial Average DJIA, +2.51% Is. Data Wednesday afternoon. The Nasdaq was not far from a 20% retreat from its November record high, a range that would put it in a bear market.
Reading: The Nasdaq Composite is nearing its first bear market in nearly 2 years. Here’s the viewing level.
Strategists said that “real-time high rates are being priced in, growth gloom and a COVID inflection point.” Nasdaq’s earnings cut 0.5% since the third quarter, while the S&P 500’s earnings rose 2%, their note shows.
According to strategists, after the tech bubble that peaked in 2000, it took almost a decade for the sector to recover and regain its momentum.
“During that period, many companies went away,” he said. “Which remained consolidated capacity, repaired the balance sheet and began to return capital.”
BofA Global Research Report dated 22 February 2022
“When do you buy all the tech?” The strategists wrote in their note. “When everyone stops asking when to buy tech. Before that it could be a falling knife or dead money.”
In a note emailed Wednesday, Datatrack Research looked at future earnings forecast revisions for the top 10 holdings in the Ark Innovation ETF ARKK, +3.35%, and found that Wall Street analysts are still cutting estimates on most of them. Huh. The two exceptions were Tesla Inc., wrote Datatrack co-founder Nicolas Kolas. TSLA, +1.14% and UiPath Inc. Path, +1.20%, whose income revision is for both 2022 and 2023.
Kathy Wood’s Ark Innovation ETF is down more than 33% this year, as of Wednesday afternoon trading, FactSet data shows.
“This is not for cursing Ark or Kathy Wood; We respect what they have created and understand their perspective on disruptive technology,” Kolas said in the note. Instead, he referred to the Woods Ark Innovation ETF as “a proxy for a basket of troubled technology” stocks. and sought to point out that the name ‘speculative technology’ still does not turn around in terms of future earnings revisions.”
