Photographer: Mike Kane/Bloomberg

Large-Cap Funds Dump Tech Giants for Consumer Stocks, BofA Says

  • Consumer discretionary firms now the most popular S&P sector
  • Active managers cut their exposure to tech in fourth quarter

Move over, Alphabet Inc. and Facebook Inc.

After holding tech firms at levels above their weighting in the S&P 500 for four straight months, investors are now overweight consumer discretionary stocks the most. That’s according to strategists at Bank of America Corp. who analyzed large-cap active funds’ exposure to S&P industries relative to their benchmarks.

Fund managers dumped tech more than any other S&P 500 industry as of Jan. 31, compared with three months earlier, while boosting their consumer discretionary holdings more than any other group, strategists Savita Subramanian said in a note to clients.

Fund managers’ exposure to tech firms stands at a 15-month low with chipmakers being the hardest hit after six straight months of cuts and the lowest-conviction overweight rating in more than 18 months.

U.S. tech companies added more than $1 trillion in market cap last year, with gains from Apple Inc., Microsoft Corp., Inc., Facebook Inc. and Alphabet accounting for a quarter of the S&P 500’s advance. Market darlings since the 2016 presidential election, tech stocks have seen passions cool off as concern mounts that they won’t be able to repeat the run they had in 2017.

“There was likely an attempt to reallocate the money from the sector that has outperformed the market to the one that has been lagging behind,” Walter Todd, Greenwood Capital chief investment officer, said by phone. “Tech stocks have had a great performance since the U.S. presidential elections, so some managers thought it was worth putting the money somewhere else.”

Source: Bank of America Corp.

Tech stocks jumped 26 percent last year through late September, more than twice the advance in consumer discretionary stocks, which includes Macy’s Inc., Under Armour Inc. and Viacom Inc. As their prices rose, so did the pressure for the sector’s earnings to live up to expectations.

Besides stretched valuations, concern is growing that the industry could be the next victim of President Donald Trump’s increasingly combative stance toward global trade partners. In January, Trump said he was considering a fine on China because it forced U.S. companies to share intellectual property as a cost of doing business there. And in his State of the Union address, Trump pledged “strong enforcement” of U.S. rules that protect business secrets.

This comes as the fourth-quarter filings showed that while hedge funds added to tech holdings, they jettisoned the FANG bloc of Facebook, Apple, Netflix and Alphabet.

To Matt Maley, a Miller Tabak equity strategist, there was a clear overreaction. After all, almost every one of the 10 biggest gainers in the S&P 500 so far this year are tech firms.

“I don’t blame people moving out of it. They had great gains last year,” Maley said. “Maybe the high-flyers have run too much too fast, but the group in general is still a strong performer and there is a potential for further upside.”

— With assistance by Jeremy Herron

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