Bank of America - four reasons why technology's dominance of the US stock market may be coming to an end

The tech sector's dominance of the US stock market may end by the end of this year, according to Bank of America, writes Business Insider.

It would be an important change for the world's largest stock exchange, given that, catalyzed by the significant increase in profits, technology growth stocks have been investors' favorites over value stocks. defensive fields, paying substantial dividends), even during the 2022 price crash.

Savita Subramanian, equity strategist at Bank of America, believes that if interest rates remain high, several sectors are likely to have high returns, so that other industries will come to the fore for investors in the fourth quarter of the year.

According to the strategist, there are four reasons why the dominance of technology will diminish.

• Profits, not the economy

Low interest rates, excess liquidity and weak economic growth are the most frequently cited direct factors for the rally in tech stocks since 2009, but Subramanian says it all comes down to profits in the end.

"Tech won more, so tech outperformed," the strategist wrote in a note published earlier this week, according to Business Insider.

But the gap between the growth rate of tech and non-tech companies' profits is starting to narrow, which should get investors' attention.

"As returns outside the tech sector accelerate, investors are likely to become more price-sensitive and look for cheaper stocks whose profitability is rising," Subramanian wrote.

• Higher interest for longer

Profits are the key driver of tech stocks' outperformance, but high credit costs can affect companies differently, to the detriment of long-term growth companies whose trading prices include high premiums that call for higher cash returns, he says the strategist.

In his view, interest rates are likely to rise further, or at least remain high for longer than most expect, due to reduced demand for 10-year US Treasuries from the Federal Reserve and foreign buyers such as China and Japan.

Also, nominal GDP growth is putting pressure on real interest rates, and US sovereign risk highlighted by record debt-to-GDP levels suggests a need for higher yields on Treasuries.

• The current economic cycle favors the cyclicality of market leaders

Bank of America's valuation models suggest that both the United States and European economies are showing signs of entering the first phase of the "recovery" regime, which has historically favored value stocks over growth stocks.

"Information technology and communications have lagged behind in previous recovery periods," Subramanian wrote.

• The long-term beneficiaries of artificial intelligence may be outside the tech sector

Tech stocks have been at the center of the AI-induced stock market rally, but that may change as AI adoption begins to reach saturation. Shares in Nvidia, Microsoft, Amazon, Alphabet and Meta rose as they invest heavily in artificial intelligence.

But the gains may be temporary, and the long-term returns may come to companies outside the tech sector whose margins improve by integrating AI into their businesses. "The service sector may be next, on the disruptive train of artificial intelligence," wrote Subramanian, quoted by Business Insider.