Tech stocks are now among the most overvalued after investors flocked to the sector for safety during the bank crisis, Barclays says

• Tech stocks are overvalued after investors sought refuge in the sector during the SVB crisis.
• A potential credit crunch puts tech at risk in a shallow recession, Barclays said.

The banking crisis that erupted this month ignited a rush into large-cap tech stocks, and the flight to safety has left the sector among the most overvalued in the market, Barclays said in a note Monday.

The S&P 500 Information Technology sector has climbed nearly 6% over the past month, solidifying its place as the second-best performing group of the S&P 500 during 2023. The group bounced off its most recent low just after Silicon Valley Bank and Signature Bank collapsed and were taken over by regulators earlier this month, accelerating a drain in deposits by customers at small and mid-tier banks.

"Flight to safety has benefited Tech thanks to lower yields and the sector's quality bias. We caution against chasing this trade however, considering elevated valuations and exigent inflation/rate risks," Venu Krishna, head of US equities strategy at Barclays, wrote to clients in a note published Monday.

A slide in Treasury yields from this year's peaks has helped fuel the 17% jump in the S&P 500 Information Tech group. The slump in yields can translate into lower borrowing costs as high costs cut into the value of future earnings for tech and other growth companies. The S&P 500 turned negative but has since risen by 4%.

But yields have been falling as traders worry the drop in deposits for regional banks could morph into a credit crunch for US households and businesses, heightening recession risks. The deposit drain hit regional lender First Republic Bank so hard that it led to larger rivals creating for it a $30 billion rescue package.

"Tech is more intertwined with the real economy than ever in a post-pandemic world, and are premium long-duration equities really an appropriate safe haven as we deal with both rising rates and tightening credit? We don't think so," Krishna wrote.

"Rather than chasing yet another crowded trade that is vulnerable to the next unwind, we recommend seeking safe haven among quality stocks at less demanding valuations," he said.

Barclays said the banking crisis pushed it closer to its view that a shallow recession will take hold of the US economy sometime this year. In that scenario, it sees the S&P 500 ending at 3,725, which represents a 6.1% decline from Friday's close at 3,970.99.

Investors have flocked to mega-cap tech stocks as they generally screen well on quality metrics because of their strong balance sheets, high profitability, and earnings stability, Barclays said.

"However, we think the rotation was amplified by crowded trades getting caught offside and squeezed out of their positions, including the severe underweighting of Tech heading into the banking crisis," the investment bank said.