If you don’t agree with Morgan Stanley’s Michael Wilson when it comes to whether tech is due for a sharp correction, you can count Goldman Sachs as your ally in the war against “fake” tech pullback news.
Wilson grabbed headlines this week by reiterating his cautious take on the tech space amid a sudden correction in the FANG+ index catalyzed by Facebook’s July 26 plunge.
“The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February”, Mike wrote, in a July 30 note called “Growth vs Value Run Appears Over”.
“It could very well have a greater negative impact on the average portfolio if it’s centered on Tech, Consumer Discretionary and small caps, as we expect”, he continued.
As documented here on Friday afternoon, Wilson was essentially expanding on a July 8 note and without mentioning Morgan Stanley by name, Goldman is out on Friday evening making it abundantly clear that they do not agree.
After elaborating on all the reasons to be bullish, the bank’s David Kostin writes the following:
But a number of different portfolio strategists declared this week that a correction in the US equity market is imminent. According to various news articles, the strategists each point to the Information Technology sector as a source of the problem. The bears argue that positioning in the sector is “crowded,†the sector is overvalued, growth has peaked, and 2Q results will lead to a sharp decline in longterm growth prospects, with devastating consequences for stocks as highlighted by the plunge in FB shares after it cut guidance last week.
Well, suffice to say David ain’t buyin’ what Mike and unidentified others are sellin’. Or maybe it would be more accurate to say that David is buyin’ what Mike is sellin’, depending on whether you want to speak literally or figuratively. Here’s Goldman again:
Tech is less of a “crowded trade†than many investors believe. Our analysis of $2 trillion of mutual fund holdings shows large cap funds have a 217 bp overweight tilt in the Tech sector relative to their respective benchmarks. While this is the largest tilt among sectors, it is a smaller overweight than funds held during the last two years. Similarly, our analysis of public filings covering $2.3 trillion of hedge fund gross exposure shows funds have 25% net exposure to Tech stocks, an 84 bp tilt vs. the Russell 3000 that has actually declined from levels in 2016 and 2017. The Goldman Sachs Prime Services Weekly shows clients have 26% net exposure to the Tech sector. Our data and analysis conflict with the Bloomberg story this week in which another bank proclaimed its hedge fund clients have 46% net exposure to Tech.
So what’s the bullish catalyst for tech from here?, you might fairly ask. Well, how about buybacks? Does that work for you? Cause it works for Goldman.
Specifically, Kostin notes that the bank’s buyback desk has now raised its repurchase authorizations estimate to a record $1 trillion for 2018 and because tech has accounted for 40% of YTD authorizations but only 21% of executions, “significant potential demand remains for Tech shares as firms look to complete their existing programs.”
(Goldman)
There you go. It’s a veritable clash of the titans when it comes to the tech selloff thesis.
Choose a side.
We all hope this is a better call than Goldman’s Avi Gilbertesque commodities call?