Bank of America analysts urged caution when it comes to buying the dip in tech stocks, warning that despite the recent selloff, the sector remains risky.
According to BofA, the Information Technology sector trades at a “record EV/Sales” ratio, signaling that valuations are still stretched, even after the recent downturn.
The bank emphasizes that tech stocks are “cyclical, not secular,” meaning they are closely tied to economic fluctuations.
This cyclical nature, coupled with upcoming changes to Standard & Poor’s index-cap rules, introduces what BofA says is “concentration risk” for mega-cap tech stocks, raising concerns about passive selling, which could further pressure these names, according to the investment bank.
Elsewhere, BofA’s broader outlook highlights volatility in the short, medium, and long term. The bank’s “Regime Indicator” is said to have recently shifted from an “Upturn (buy risk)” to a “Downturn (sell risk)” signal, reinforcing the cautious stance on growth-driven sectors like tech.
BofA states: “Quality, stability and income have protected investors in prior volatile markets.”
Meanwhile, in contrast to tech, BofA is more positive on defensive sectors such as Utilities and Real Estate, which they note offer more stable dividends and inflation protection.
Utilities, dubbed the “tortoise” of the market, have delivered total returns in line with the Nasdaq’s “hare” over the long term. The bank is raising Utilities to overweight, citing the attractive dividend yield and protection from inflation.
Overall, “Don’t buy the Tech dip,” argues BofA, as growth stocks face continued headwinds, and defensive sectors offer a more stable opportunity.
