Technology stocks are bearing the brunt of a recent market selloff, putting a spotlight on how an extended downturn in the sector could weigh on broader equity indexes.

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After Monday's sharp drop, the S&P 500 technology sector is down 6.7% since the overall S&P 500 closed at a record on Sept. 2, compared with a 5.2% decline for the broader index over that time.

The tech-heavy Nasdaq Composite, meanwhile, is down 7.3% from its Sept. 7 closing high, getting closer to marking a 10% correction.

The tumble comes amid a cluster of worries that hit markets in recent weeks, including a looming unwind of the Federal Reserve's easy money policies, a jump in Treasury yields and a nasty battle among lawmakers over the U.S. debt ceiling.

Many investors are hesitant to cut their exposure to technology-focused stocks, which have led markets for most of the last decade and are expected to deliver strong earnings growth even if the economic climate worsens. Previous dips over the years have often been met by furious buying.

Still, a heavy weighting in broader indexes, comparatively elevated valuations and wide ownership have led some investors to worry over the repercussions of a prolonged period of underperformance for tech and tech-related names.

Here are a few of the metrics investors are studying as they weigh whether to stay the course in tech or pare back their holdings:

A CROWDED TRADE

Years of solid performance have made tech stocks a mainstay in portfolios across Wall Street, periodically spurring concerns that they may be susceptible to violent market swings if investors try to sell all at once.

Facebook, Amazon, Microsoft and Google-parent Alphabet have ranked among the top five most popular hedge fund long positions for the past 15 consecutive quarters, a study by Goldman Sachs showed.

At the same time, 40% of fund managers surveyed by BofA Global Research in September said buying U.S. technology stocks was the market's most crowded trade, a designation tech stocks have received for three straight months.

WEIGHTING IN THE S&P 500

The tech sector by itself holds a 27.7% weighting in the S&P 500, more than twice that of the number two sector, healthcare. Adding four tech-related companies that are in other sectors -- Alphabet, Amazon, Facebook and Netflix -- boosts that weighting to 38.8%.

VALUATIONS

The technology sector trades at 25.8 times forward 12-month earnings estimates, compared with 20.7 times for the overall S&P 500, according to Refinitiv Datastream.

While growth and technology stocks have typically commanded greater valuations in recent years, some market participants worry that the category's reputation for delivering gains year after year has helped stretch their prices beyond levels that may be justified by fundamentals.

EARNINGS

The tech sector's earnings held up much better than those of the broader market last year as the coronavirus pandemic wreaked widespread economic havoc. As the world emerges from lockdowns this year, tech's profit growth has not been quite as strong as S&P 500 companies overall.

First Published:Oct 5, 2021 12:39 PM IST