The MSCI World Information Technology index is up 19.5% year-to-date, versus around 7% for the broader benchmark. The rally in tech has gained extra momentum from positive first-quarter results from the sector, including a 14% rise in Meta shares on Thursday, contributing to a 2.4% rise in the Nasdaq and 1.96% in the S&P 500.

The downside to this is that the sector's valuation, at roughly 23 times earnings for the next 12 months, is more than 15% above the 10-year average. By contrast, the MSCI All Country World Index is trading on a price-to-earnings ratio of 15.7 times, in line with its average over the past decade.

This elevated valuation contributes to our view that investors should not be adding to tech exposure above their strategic allocations. But this does not mean that investors should shun the sector altogether. IT is the largest single component of the MSCI All Country World Index, at 22.5%—well above financials, the second-heaviest, at 13.9%. Our stance to keep the sector least preferred implies an exposure only marginally below benchmark, rather than a call to aggressively sell down tech holdings.

In addition, investors should not neglect promising areas of long-term growth within technology. We see several parts of the sector with particular upside potential.

The latest earnings underline the strong growth outlook for artificial intelligence. We expect the broad AI hardware market to grow 20% a year to reach USD 90bn by 2025. We see AI as a horizontal technology that will have important use cases across applications and industries. From a broader perspective, AI, along with big data and cybersecurity, forms what we call the ABCs of technology. We believe these three major foundational technologies are at inflection points and should see faster adoption over the next few years as enterprises and governments increase their focus and investments in these areas.

The metaverse, while still in its early stages, is poised to expand rapidly over the coming years and decade. The metaverse is a deeply immersive virtual experience that will have a major impact on economic activity. We see a range of experiences in the metaverse—from augmented reality (AR) to full virtual reality (VR)—at various price points that will enable a large global user base. In our view, several factors could have positive implications for the theme. Younger populations are becoming a larger part of the consumer cohort as they enter peak earnings years and are digital natives, having grown up in a world where technology was already ubiquitous. As the more digitally native population expands, adoption of metaverse-related activities will increase.

Demand for automation and robotics is on the rise. The smart automation industry's total annual revenues currently stand around USD 269bn, and we expect the sector to grow around 12% annually in 2023 and 2024. We anticipate hardware companies with sizable software exposure to grow their automation businesses over the longer term by mid-single-digit rates and pure-play software companies by high-single-digit rates.

So, while we view the tech sector as least preferred, we continue to see areas of opportunity. Overall, given the potential macro scenarios, we see better risk-reward in high-quality bonds than in broad US equity indexes.