By Lewis Krauskopf

NEW YORK (Reuters] – The recent selloff in technology stocks has put a spotlight on the potential impact of a longer downturn on the wider equity indexes.

After Monday’s sharp drop, the technology sector is down 6.7% since the overall S&P 500 closed at a record on Sept. 2, compared with a 5.2% decline for the broader index over that time.

Tech-heavy is now down 7.3% from Sept. 7’s closing high and closer to marking 10% correction.

It comes amid worries such as a slowing down of Federal Reserve’s easy money policy and rising Treasury yields.

Technology-focused stocks are popular among investors. They have led the markets for most the last decade. Investors should not be afraid to decrease their exposure. They are likely to continue growing earnings even as the economy worsens. Past dips have been often met with furious buying.

However, investors are concerned about the potential consequences of prolonged periods of low performance for tech companies and related names due to their heavy weightings in wider indexes.

Investors are looking at a variety of metrics when they decide whether or not to continue investing in technology.

CROWDED TRADE

The tech stocks are a solid investment that has been proven over the years. Investors have occasionally expressed concern about their vulnerability to sudden market swings.

According to a Goldman Sachs study, Facebook (NASDAQ), Amazon (NASDAQ), Microsoft (NASDAQ) and Google’s parent Alphabet (NASDAQ) ranked amongst the most popular five hedge fund long positions over the past fifteen quarters.

BofA Global Research found that 40% of respondents to a September survey said they believed buying U.S. stock technology was the best trade. Tech stocks received this designation for three consecutive months.

Click here for a visual on crowding tech shares

https://graphics.reuters.com/USA-STOCKS/TRADE/gdpzyqobjvw/chart.png

WEIGHTING IN THE S&P 500

The tech sector by itself holds a 27.7% weighting in the S&P 500, more than twice that of the number two sector, healthcare. The weighting of the tech sector is now 38.8% when you add four other companies — Alphabet Amazon Facebook Netflix (NASDAQ.)

For a graphic on Tech’s weight in S&P 500 vs other sectors:

https://graphics.reuters.com/USA-STOCKS/TECH/zjpqkjbnwpx/chart.png

VALUATIONS

The technology sector trades at 25.8 times forward 12-month earnings estimates, compared with 20.7 times for the overall S&P 500, according to Refinitiv Datastream.

Although technology and growth stocks are generally more valued in recent years than other stock types, market participants fear that their reputations for producing gains year after year may have helped push up the prices.

For a graphic on Tech’s widening valuation gap over S&P 500:

https://fingfx.thomsonreuters.com/gfx/mkt/znpnebrjnvl/Pasted%20image%201633372771486.png

EARNINGS

As the global coronavirus pandemic caused widespread economic chaos, the earnings of tech companies held up better than the wider market’s. As the world emerges from lockdowns this year, tech’s profit growth has not been quite as strong as S&P 500 companies overall.

For a graphic on Percent earnings growth, tech vs S&P 500:

https://graphics.reuters.com/USA-STOCKS/EARNINGS/gkvlgwoqlpb/chart.png