Deutsche Bank has upgraded global technology stocks to "overweight," arguing that a recent selloff and a retreat in investor positioning have improved the sector's risk-reward profile. The bank's strategists, led by Parag Thatte and Chief Strategist Binky Chadha, said much of the concern about AI demand is already reflected in valuations.
Mega-cap growth and technology stocks underperformed the rest of the S&P 500 by more than 16 percentage points over three weeks, according to the report. The technology group fell 11% in that period, while the remainder of the benchmark gained almost 6%.
Deutsche Bank said investor positioning has moved from elevated levels to neutral. It described exposure as now more closely in line with an expected earnings growth rate of around 10% for the sector. The bank cited earnings growth of about 47% in the third quarter and consensus expectations of 36% by the end of next year.
The bank noted that previous rotations back into technology delivered an average gain of 32%, outperforming the rest of the S&P 500 by 30 percentage points. It said the broader benchmark gained an average 16% over the three months following those rotations.
Deutsche Bank said earnings strength extends beyond technology. Technology and energy account for about three-quarters of expected third-quarter S&P 500 earnings growth of 31%. Earnings growth excluding those sectors is expected at 12%, the bank said. It put median S&P 500 company growth at 14.4%.
The bank acknowledged risks from possible technology regulation after the US midterm elections and further geopolitical escalation. It said equity and oil markets have already priced in substantial uncertainty. Oil prices were about 65% above its estimate of medium-term fair value, the report said.
Deutsche Bank said the correction created a more attractive entry point, but further downside remains possible if another major external shock occurs.