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A once-hot sector hits a 10-session losing streak, an ominous sign for markets

By Chris Dieterich and Ben Eisen 

Tech stocks, the top-performing stock group this year, are in a rare funk.

The largest U.S. technology companies in the S&P 500 on Thursday fell for the 10th session in a row, the longest losing streak in nearly five years.

Waning enthusiasm for fast-growing and widely owned tech stocks at a time of flat broader-market performance is a potentially ominous sign for those tracking market sentiment. Investors had flocked to the group in recent months amid rising uncertainty about the pace of U.S. economic growth and the timing for implementation of pro-growth economic policies.

Tech stocks within the S&P 500 have been by far the biggest winners in 2017, climbing 10% versus a 4% advance for the broader index. Apple Inc., the world's largest company by market value, is up 22% so far this year, while Facebook Inc. has climbed 21%.

Strength in tech this year followed a three-week blip of weakness in the immediate aftermath of November's U.S. presidential election. Tech stocks were down as much as 2.7% by the first day of December, while the S&P 500 climbed nearly the same amount.

At the time, traders pinned weakness to investors who appeared to be paring back tech holdings to make room for economically sensitive industries including banks and construction materials, which propelled the market higher in anticipation for policy-driven economic growth.

Tech has swiftly closed the gap as a booming U.S. stock market pushed the Dow Jones Industrial Average above 20000 for the first time in January and drew investors into name brand stocks within the technology sector. Political wrangling in Washington, D.C. in recent weeks, meanwhile, has dimmed prospects that market-friendly tax cuts and infrastructure spending will happen in 2017. Formerly highflying financial and industrial stocks have faded, making the consistent profit and sales growth available in big-cap tech companies even more alluring.

Tech's pullback during the past 10 sessions has been mild, just 2%, and comes weeks before tech companies are expected to report stout profits in the first quarter.

S&P 500 tech companies are forecast to report profit growth of 13.3%, topping the 9% expected of companies in the broader index. That would be the best quarter for tech earnings in five years, according to FactSet.

"The fact of the matter is that growth is still scarce," said Michael Block, chief strategist at Rhino Trading Partners. "Where do you go for growth? Into these big tech stocks."

Tech could find its footing should so-called cyclical stocks including those in the financial, industrial an materials groups lag if signs of growth fail to materialize. Economists polled by The Wall Street Journal expect the final reading on fourth quarter gross domestic product, a broad reading of economic growth, to clock in at a middling 2%. First-quarter GDP growth is forecast to grow just 0.6% according to the most recent estimate from the Federal Reserve Bank of Atlanta.

Regardless, tech stocks will have an outsize influence on major stock benchmarks that power trillions of dollars in index-tracking mutual and exchange-traded funds. Tech stocks comprise nearly 21% of the market capitalization of the S&P 500, the most of any sector. Combined, three large tech companies -- Apple, Microsoft Corp., and Google parent Alphabet Inc. -- have more heft in the S&P 500 than three entire sector groups, utilities, telecommunications, and materials.

Further losses in tech stocks would be felt by a large swath of investors. Microsoft, Alphabet and Apple were the most widely held stocks in institutional equity strategies at the end of 2016, according to data submitted to eVestment, a data and analytics firm.

Write to Chris Dieterich at chris.dieterich@wsj.com and Ben Eisen at ben.eisen@wsj.com

(END) Dow Jones Newswires

April 14, 2017 02:47 ET (06:47 GMT)

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