Tech stocks have plunged while energy stocks soar, but don't count on energy leading another bull market, Ned Davis Research says

• Tech stocks have plunged this year while energy stocks have soared, but don't count on energy leading another bull market, Ned Davis Research said.
• Analysts pointed to the larger weight of the tech sector compared to energy in the global stock market.

Tech stocks have plunged this year while energy stocks soared, but don't count on energy leading another bull market, according to Ned Davis Research.

"While the Tech underperformance has had little positive impact on the sector's valuations, the Energy outperformance hasn't changed its undervalued status," the research firm's analysts said in a note on Wednesday. "A problem for the market is that it can't rely on Energy to lead a new bull market with the Tech sector lagging."

A key reason why energy can't lead the market higher is that the tech sector is more heavily weighted compared to energy in the global stock market.

Tech firms account for 21% of the All Country World Index's market cap, while energy firms account for just 5.8%, according to Ned Davis. The tech sector is generally more expensive than energy, being one of the ACWI's top 11 most expensive sectors.

"For the current market recovery to prove sustainable, a participating Tech sector will be needed," analysts said, adding that improving breadth in the tech sector may also make it possible for a new cyclical bull market to take shape.

That comes after tech stocks have taken a beating recently amid aggressive Fed rate hikes, while titans like Amazon, Meta, and Tesla reported downbeat earnings or guidance. And it's unclear how much upside tech stocks have in the near term, as Fed officials have signaled they will press forward with more tightening and potentially lift rates to a higher peak level than previously thought.

Meanwhile, the energy sector has benefitted massively from soaring oil and gas prices stemming from Russia's invasion of Ukraine. Shell, for instance, took in $9.9 billion in the past quarter, its second-highest profit in history, and Exxon broke its all-time profit record.