Wall Street traders seem to be missing signs Tech stocks rally may be exaggerated, as evidenced by the significant increase in S&P 500 Information Technology Index and high stock valuations.

What happened: expectations that the federal reserve will pan from its rate hike cycle has propelled the S&P 500 Information Technology Index up 19% in 2023, compared to a 7.7% gain for the S&P 500 Index, reported Bloomberg.

This is the strongest start to the year for the index relative to the S&P 500 since 2009, the report said.

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Another example that optimism may have reached greater heights is that technology stocks are trading at nearly 25 times forward earnings in the S&P 500. Such a multiple would only be justified if the central bank cut rates by at least 300 basis points, data from Bloomberg Intelligence shows. That’s more than five times what the swap market is pricing in for rate cuts this year, it said.

The SPDR S&P 500 ETF Trust SPY has gained over 8% during the Invesco QQQ Trust Series 1 QQQ is up over 19% year-to-date.

However, options traders are not as optimistic as stock investors. The cost of contracts that protect against a 10% drop in the Invesco QQQ Trust is now 1.7 times the cost of options that benefit from a 10% rally – the highest in a year, Bloomberg reported.

Expert Opinion: Quincy Krosbyglobal chief strategist LPL FinanceBloomberg said traders are betting on a major reversal in Fed interest rate policy, but there is no certainty if and when that will happen.

“Longer term, the sector’s growth prospects are attractive, but not at current valuations,” Krosby said.

Last week, two Federal Reserve officials reiterated the need for more rate hikes to curb inflation just before the central bank enters a quiet period from April 22nd to May 4th its next monetary policy announcement.