Are Tech Bubble Fears Overblown? 6 Top-Ranked Picks

Tech stocks have been on a tear this year and Tuesday’s session was no exception with the Nasdaq closing 0.5% higher. Overall, tech stocks have been largely responsible for the long-running market rally. But bubble fears are making a comeback courtesy of a bunch of leading analysts and market watchers.

They feel that monetary tightening by the Federal Reserve and the ECB could lead to a sudden sell-off. However, others feel that sector fundamentals are firmly in place and valuations are far from worrying. The ability to innovate and generate strong profits make tech stocks must haves for your portfolio.

Rate Hikes Raise Bear Market Fears

Michael Hartnett, a strategist at Bank of America’s (BAC - Free Report) Merrill Lynch recently warned that tech stocks have strong downside risks. Hartnett thinks that the strong performance of tech stocks, especially the FAANG group, has led to disconnect between U.S. equity markets and events occurring in other parts of the world. 

Hartnett thinks that this "conscious decoupling" is likely to evaporate in the months ahead as major central banks undertake monetary tightening. The Fed is widely slated to raise rates this week. And record-low employment levels could lead to further rate hikes even at the cost of roiling the equity markets.

Meanwhile, the ECB is also likely to begin cutting down on its bond purchases in the next few months. Emerging markets are following suit, with 33 rate hikes in the last nine months. Global monetary tightening would mean an end to easy money for the bourses, raising the risk of “quick, deep tech sell-off,” thinks Hartnett.

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Strong Fundamentals Still in Place

In contrast, analysts at Goldman Sachs (GS - Free Report) have taken a distinctly optimistic view of tech stocks. In a recent paper titled "Why Technology Is Not a Bubble," the investment bank says that the recent success of tech stocks is attributable to strong fundamentals. This is in sharp contrast to the dot-com bubble which built up in the 1990s.

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