RBC downgrades tech sector on valuation concerns

RBC Capital Markets analyst Lori Calvasina has downgraded the technology sector from an "Overweight" rating to "Market Weight" after an impressive 2023 performance stirred doubts around current valuations. Offsetting its tech downgrade, RBC lifted ratings for the consumer discretionary and utilities sectors.

Yahoo Finance's Josh Schafer breaks down the details.

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Editor's note: This article was written by Angel Smith

Video Transcript

SEANA SMITH: Let's get to a big call out from Wall Street. RBC Capital Markets seeing more downside risk for tech, downgrading tech to market weight, that's down from overweight. Now the analysts there Lori Calvasina saying that after a massive rally in 2023, the tech sector's valuations are clearly expensive for the median stock in the sector. Break it all down, we have Yahoo Finance's reporter Josh Schafer. Josh what does everyone need to know and keep in mind when this is one of the biggest risks you could say to the broader market.

JOSH SCHAFER: So keep in mind, I would say, when we talk about market commentary, when we talk about how Wall Street ranks these sectors, remember you can only be overweight in so many sectors, right, Seana, and I think that's an important thing to highlight here. They're going from overweight to equal-weight on tech. They're not going underweight here, they're not saying tech is not a place to be, just maybe there's better places to be. And I think even when we think about the recent calls on Apple, that's a way to understand how Wall Street commentary works. It's not necessarily saying sell the stock or sell the sector, but maybe you can make more money elsewhere.

And when you think about what else RBC moved up here, so you take a look at tech, they downgraded tech, they upgraded consumer discretionary, and they upgraded utilities to overweight. You take a look at those three charts over the last year, guess what, tech outperformed consumer discretionary and tech outperformed utilities. So it's not that hard to look at that chart and understand if we were thinking what's got more room to run here, it's probably not tech. At a high level, that's a way to understand this call.

But one other thing that they highlight in here it's saying a positive on tech. They talk about revisions to EPS, revisions to earnings per share, and the overall outlook for fourth quarter earnings. There's a great chart out from Deutsche Bank I want to highlight here that shows earnings revisions that we're seeing for the current quarter. See all those negatives on your left? Brad, what's the only one that's positive there?

JOSH SCHAFER: Oh man, tech at the bottom.

JOSH SCHAFER: It's tech at the bottom.

BRAD SMITH: Wow.

JOSH SCHAFER: So when we're talking about earnings revisions, the only sector that held up over this big splash of earnings revisions we've been talking about going into Q4 was tech. Now, again, you could still argue the stocks are, quote, unquote, "overpriced," but people think earnings are going to be good people like sales in the sector. So I wouldn't quite go ringing the alarm bell on tech necessarily.

SEANA SMITH: All right, certainly. And it's also goes back to what we've been hearing just in terms of some of the calls that have come out from Wall Street over the last week or so on Apple. A lot of those analysts raising some questions just about valuation, not exactly saying we'll see a huge move to the downside, but we'll likely see maybe some trend here along the flat line, given the massive run off.

JOSH SCHAFER: Apple trading near an all time high, right? At some point, it's hard for the path forward for these stocks to just be up up and up at least in a short time period. Apple trading near $200 a couple of weeks ago, it's a price we've never seen. And then the calls from the bullish analysts out there for 220 to 230, you're asking for a lot at some point to happen very quickly. Patience always helps.

SEANA SMITH: And here we are today right around 185 a share. All right, Josh, thanks so much for breaking that down.