Up 16% in 2024! Are ASX tech shares now overvalued?

ASX tech shares have been the frontrunner during the share market's rally to new heights. On a year-to-date basis, the Australian information technology sector is up 16%, nearly twice the return of the runner-up.

It's a similar scene over in the United States. A surge in appetite for artificial intelligence (AI) has boosted US tech stocks. This is apparent from AI chip makers Nvidia Corp (NASDAQ: NVDA) and Super Micro Computer Inc (NASDAQ: SMCI) being the two best-performing stocks in the S&P500 in 2024.

However, one broker believes the best of times for tech is now at a temporary high.

Finding better value elsewhere

Some like to apply a sector rotation strategy when specific sectors are soaring beyond others. By selling into strength and rotating into weakness, investors hope to maximise returns while reducing downside risk.

The hedge fund behind Goldman Sachs (aka Goldman Sachs Asset Management) is taking this approach to tech. In an interview with Bloomberg, Alexandra Wilson-Elizondo, co-chief investment officer of multi-asset solutions, shared a view that now is the time to take some profits in the sector.

Elaborating on the fund's current stance, Wilson-Elizondo said:

We like taking profits on technology and moving toward other sectors. the risk-reward profile is skewed to the downside. While we still believe in being long equities and having them in the portfolio, we think that there are some more attractive opportunities to access.

The comments coincide with a recent re-acceleration in US inflation. Year-over-year US inflation for March came in hot at 3.8% overnight. The figure poured cold water on the hopes of an interest rate cut happening soon.

Wilson-Elzondo's point also speaks to a bigger concern. What if inflation rages back with a vengeance?

As shown above, the strength in US and ASX tech shares is inversely aligned with the fall of inflation. With the NASDAQ-100 Index (NASDAQ: NDX) up 64% since inflation began falling, one wonders what might happen to the tech sector if the recent inversion continues.

Are ASX tech shares the same?

Goldman Sachs Asset Management is explicitly talking about US tech shares. But aren't ASX tech shares guilty of the same success? It's the valuation that Wilson-Elizondo points out as a worrying factor on Wall Street.

Let's look at a valuation comparison between Aussie and US tech giants:

Like our US counterparts, some of our largest tech companies are trading on high price-to-earnings (P/E) ratios.

Future growth can excuse a premium P/E ratio. However, the risk lies in the company living up to those expectations — expectations that could be made harder by a resurgence of inflation.