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Quarter-End Insights

Tech Pullback Reveals Some Attractive Opportunities

Software is the most appealing subsector.

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2020 was a banner year for the technology sector, as it outperformed the broader market both during the COVID-19-related downturn and the subsequent recovery. However, tech's outperformance started to reverse in the first quarter of 2021. Across most of the sector, robust fundamental tailwinds still support future growth in areas such as cloud computing, 5G, and the "Internet of Things." For most stocks, we characterize the pullback as rather healthy, and we’re starting to see some with moderately attractive margins of safety for investors, mostly in large-cap software. In some cases (especially remote working stocks), however, valuations have pulled back a bit further but are still very overvalued, in our eyes.

As of March 26, the Morningstar US Technology Index was still up 67.6% on a trailing 12-month basis, outperforming the U.S. equity market, which is up 58.4% on a TTM basis. Over the past three months, tech underperformed the broader market, up only 1.62% compared with 5.98% for the U.S. equity market.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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