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By Akane Otani and Steven Russolillo 

One of last year's most profitable trades is breaking apart, thwarting expectations for global investors betting on a handful of U.S. and Chinese technology titans' enduring dominance.

For much of the most recent leg of the bull market, investors searching for growth piled into shares of a group loosely known as "FAANG-BAT," comprising U.S. tech giants Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Alphabet Inc., as well as Chinese firms Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

The group of stocks collectively rocketed 62% higher last year, more than tripling the S&P 500's gains. But that trade has begun to fracture in recent months, reflecting escalating trade tensions between China and the U.S., doubts about the global economy's health and uncertainty whether the tech sector's rally has gone too far.

While the U.S. FAANG stocks have continued their surge with a 38% gain this year, the BAT group is down 5.3%, although it remains well above an index of mainland Chinese listed stocks, the Shanghai Composite, which is down 17%.

Some investors are asking whether a pullback in China's tech firms may presage a similar one in the U.S., and if so which stocks might lead the market higher next -- as well as whether the longest-ever U.S. stock bull market may be on borrowed time.

"The market feasted all of 2017. This year it's been a very different environment," said Matt Forester, chief investment officer of BNY Mellon's Lockwood Advisors. When cracks appear in sectors that have dominated, like technology, "it's difficult to see whether you're seeing a signal or if it's just a correction for what's been a very strong sector of the market."

Technology stocks have continued to power much of the broader market's gains in the U.S., with Apple becoming the first American company to top $1 trillion in market value and Amazon's most recent quarterly profit soaring to a record on the back of its cloud-computing, advertising and retail businesses.

But the biggest Chinese tech stocks have stumbled this year as investors have grown warier of slowing growth, possible government regulation and fractious trade negotiations.

After rising at a more than 40% annualized rate over the 10 years through 2017, Tencent has tumbled 13% this year, at one point wiping out over $175 billion in market value. This month the world's largest videogame publisher by revenue reported a surprise drop in quarterly profit from a year ago for the first time in more than a decade. The restructuring of two regulatory agencies overseeing videogame content in China has delayed game approvals, hurting Tencent's largest business.

"The lesson here is no monopoly is safe in China," says Ben Harburg, a managing partner at MSA Capital, a Chinese venture fund.

It isn't just Tencent that has fallen on tough times. Chinese e-commerce titan Alibaba has dropped 17% from a record high in June and is only slightly higher for the year. Baidu, which operates China's largest search engine, is down 4.2% for 2018.

The declines in global tech stocks strike many investors as long overdue. Global fund managers have identified bets on FAANG-BAT as the most crowded trade in the market for seven straight months, according to a monthly survey conducted by Bank of America Merrill Lynch.

Some investors believe that Chinese tech stocks are simply pausing after a rapid growth spurt and may still continue to climb higher.

"This thing had to cool down at some point and readjust to more rational expectations," said MSA Capital's Mr. Harburg.

Wall Street analysts who cover the Chinese tech giants remain optimistic, with few "sell" ratings among dozens of "buy" ratings. Even though U.S. technology stocks are outpacing their Chinese counterparts this year, they, too, have been more volatile in recent months, for instance following disappointing earnings this summer from Facebook, Netflix, Twitter Inc. and Intel Corp.

Yet other analysts warn that investors may be underpricing the risk of divergence more broadly within the markets as global central banks slowly turn off the spigots that have helped risky assets rise higher since the financial crisis.

"The propensity to sell winners is becoming greater as people fear that maybe the top in the market is close," said Nitin Saksena, head of U.S. equity derivatives research at Bank of America Merrill Lynch. "That shift in psychology seems palpable compared to last year."

Write to Akane Otani at akane.otani@wsj.com and Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

August 26, 2018 12:14 ET (16:14 GMT)

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