(Bloomberg) -- Megacap tech stocks are already pricey, but the omicron coronavirus strain may make them even more expensive given their defensive characteristics.
Strategists say the group has the potential to outperform from here due to expectations for interest-rate hikes being pushed back and the focus turning to stocks that can prove shockproof. The tech heavy Nasdaq 100 Index, home to the likes of Apple Inc. and Microsoft Corp., opened 1.5% higher on Monday, outshining the S&P 500, after Friday’s brutal selloff.
Elsewhere, China’s growth-heavy Chinext Index jumped 1% on Monday, even though Asian stocks broadly extended losses. China’s Covid-zero strategy seems to be proving a boon for the gauge, which is dominated by technology and health-care names.
“I think big tech are the new defensives, with strong all-weather growth and fortress balance sheets, and given this their valuations are undemanding,” said Ben Laidler, eToro global markets strategist.
Recent history backs up this theory. Since the onset of the delta variant in late May, the NYFANG+ Index has risen 16%, outpacing a 9% gain for the S&P 500. The average 12-month forward price-to-earnings ratio for the NYFANG+ Index now stands at about 46 times, versus 21 times for the broader benchmark. Tesla Inc. and Nvidia Corp. scan as the most expensive stocks.
Falling U.S. bond yields also bode well, but due to uncertainties over omicron and sky-high valuations, a rally is not a given.
“With sentiment frothy, valuations extended, monetary policy tightening and bad Covid news accumulating ... a market sell-off seems logical,” Citigroup Inc. strategist Robert Buckland wrote in a note.
Still, Buckland recommends buying the dip, as does Wedbush Securities Inc. technology analyst Daniel Ives, who sees “a clear buying opportunity given our bullish view of the tech sector set up into 2022.”
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(Updates price in second paragraph)
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