Investors are flocking to tech and telecom stocks, but they're wrong to see them as defensive plays, Bank of America says

• Investors have been rotating into tech and communication services stocks, which they see as defensive, Bank of America said Tuesday.
• But the bank disagrees with that view in part as fundamentals are weakening.

Investors have been scooping up shares of technology and communications companies, and the rotation suggests investors incorrectly view those sectors as defensive, said Bank of America.

In a note Tuesday, analysts said $1.1 billion in sales of US stocks last week marked the first time in eight weeks that clients sold US equities. Sales were led by institutions and private clients.

Selling took place in all sectors tracked by the S&P 500, except in tech and communication services. Those two groups have logged inflows for the last six and nine weeks, respectively.

In the last two months, investors have been shifting out of cyclical sectors and into defensive ones, and inflows into tech and communication services have been outpacing defensive inflows.

"But we see risk that 'Tech' isn't as defensive as some investors perceive, with fundamentals weakening and interest rates continuing to trend higher," wrote BofA equity and quant strategist Jill Carey Hall.

The bank has said many investors have been looking at tech as the new defensive sector, particularly after the height of the COVID outbreak, as their earnings grew despite the coronavirus-induced recession.

But this year's consensus earnings for the tech-rich Nasdaq 100 index have been lagging S&P 500 earnings for the past 12 months, it said. As well, mega-cap tech companies are not immune to economic downturns and are "facing the biggest challenges amid de-globalization," BofA said in a note published last week that was referenced on Tuesday.

The third-quarter earnings season for Big Tech has largely been a disappointment — with Google's parent Alphabet posting a 27% drop in profit and Facebook parent Meta missing earnings expectations and offering a soft outlook for the fourth quarter.

BofA last week highlighted downbeat demand commentary from tech companies. Alphabet said it saw a "pullback" in third-quarter spending by some advertisers in certain areas in search ads, including among insurers, mortgage, and crypto companies. Microsoft, meanwhile, said "materially weaker" PC demand from September will continue.

On the rates side, the Federal Reserve on Wednesday is likely to push up interest rates for the sixth time this year, with expectations for another hike of 75 basis points to combat hot inflation. Higher interest rates can cut into the value of future profits made by tech and other growth companies.

The S&P 500 last week did manage to pop up by nearly 4%. The information technology sector has risen about 6% over the past month but remains down by 27% on a year-to-date basis. The communications services group has lost roughly 39% this year.