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(Bloomberg) -- Tech stocks are bouncing back. But distaste for what was the market’s favorite group as recently as last summer is starting to spread among large swaths of money managers.
Headed into the heart of earnings season, hedge funds cut their industry exposure to the lowest level since July 2016, client data compiled by Goldman Sachs showed. Meanwhile, investors have pulled money out of exchange-traded funds tracking the group for a fourth straight month, with total withdrawals topping $8 billion, according to data compiled by Bloomberg.
Blame it on whatever you want -- Apple’s sales warning, the U.S.-China trade spat and intensified regulatory scrutiny -- underlying all of it is a deteriorating profit picture. This reporting season will mark the second quarter in a row where tech’s growth trails the broad market. And things will get worse before they get better. Industry income is likely to drop in at least two quarters this year, in contrast with continued expansions for the S&P 500, analyst estimates show.
“There seems to be an assumption that the world economy, especially how it has affected tech, is going to be much worse” than economists forecast, said Tom Plumb, portfolio manager at Plumb Balanced Fund of Madison, Wisconsin. “A company as well managed as Apple would within a month have to significantly reduce expectations -- it made people very anxious that it might just be a cliff for all these companies.”
In part because of huge quarters booked a year ago, growth is flattening as companies like Apple fail to woo consumers to new gadgets in a saturating market while parts makers like semiconductor companies see demand from data centers slow. It’s grist for bears who say the post-Christmas rally in tech stocks is a head-fake that is doomed to fade.
The S&P 500 Information Technology Index has tumbled 12 percent over the past six months, trailing all major industries except energy. It’s a reversal from the previous five years, when the group beat the market by almost 10 percentage points annually. Owning computer and software stocks peaked as the most crowded trade in markets five months ago, according to a survey of global fund managers by Bank of America Merrill Lynch. Now it’s long the U.S. dollar.
With tech giants like Apple and Microsoft scheduled to announce results next week, bulls may want to find validation in the rally of chipmakers. The Philadelphia Semiconductor Index jumped 8 percent over the past two days, the best gain in more than three years, as results from Texas Instruments and Lam Research came out better than feared.