[OPINION: The views expressed by Investopedia columnists are those of the author and do not necessarily reflect the views of the website.]

In a battle between the world’s brightest investors, the big Tech behemoths have captured both love and disdain. How could they not? With companies like Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google parent company Alphabet (GOOG) – the FANG stocks – trouncing the S&P 500 in 2017, it’s no surprise industry titans like Jeff Gundlach say it’s all a bubble.

We don’t think it’s a bubble.

Throughout 2017, we’ve recommended investors buy every dip in the Tech (XLK). It’s been a winning strategy as the ETF is up almost 22% year-to-date. Our study of market history suggests that the current market environment is best aligned for tech’s continual outperformance (more on that below). But with the sector’s trailing 12 month price-to-earnings at 24 times, surely a bit of caution is in order.

Well, sort of.

It’s a common misconception that tech stock valuations are expensive. The chart below graphs the S&P 500 tech sub-sector’s forward 12-month price-to-earnings ratio over the last 30 years. As you can see, the black line (current tech valuation relative to the S&P 500) is below the green line (the 30-year average of tech’s relative valuation).

Based on market history, tech shares are the third cheapest S&P 500 sub-sector among the ten other sub-sectors. Tech trails only healthcare and telecom in terms of relative cheapness and only in the 64th percentile of all readings over the last 30 years. This compares to extremely expensive energy shares (in the 96th percentile of all readings over the last three decades) despite the sector’s -13.6% year-to-date tumble!

(See also: Valuation is not a Catalyst!)

History suggests that U.S. growth and inflation are the most causal factors for modelling future market returns. That’s a simple two-factor framework that gets you four possible outcomes. Each outcome is assigned a “quadrant” in our Growth, Inflation, Policy (GIP) model:

  • Growth Accelerating, Inflation Slowing (QUAD 1)
  • Growth Accelerating, Inflation Accelerating (QUAD 2)
  • Growth slowing, Inflation Accelerating (QUAD 3)
  • Growth Slowing, Inflation Slowing (QUAD 4)

Our GIP model currently suggests we’re in QUAD 1 (growth accelerating, inflation slowing) and should remain there through the first quarter of 2018.

Historically, this has been the best environment for domestic equities (particularly tech). The top-performing S&P 500 sectors in QUAD 1 are Technology (XLK) and Consumer Discretionary (XLY). Over the past 20 years of quarterly observations, consumer discretionary and tech have positive expected values of +4.4% and +4%, respectively, in Quad 1.

To be clear, we were definitely less bullish on the NASDAQ at July’s all-time highs and are less excited about tech today.

In addition to modeling the U.S. economy, we use a quantitative model which suggests immediate-term risk ranges for any asset class by measuring its price, volume and volatility. At its most basic level, it indicates where investors should buy low and sell high.

The NASDAQ is currently in a bullish trend, but at the top end of our risk ranges it’s wise to sell some. As we said back in July, the all-time highs for tech stocks were probably a good spot to book some gains.

In other words, our model, which dynamically adjusts throughout the day, suggests there is currently -2.0% downside and less than 0.6% upside. Not exactly the best risk-reward set-up, especially with the index within spitting distance (0.4% to be exact) of July’s all-time highs. Simply put, if you’re looking for an entry point, wait for the low end of the range to buy tech.

Summing it all up, tech shares are not expensive based on an appraisal of market history. In fact, the current market environment (U.S. growth ↑, inflation ↓ … remember: Quad 1) has historically been the best time to own tech shares. But be careful. Entry points matter. Wait for a modest pullback, then buy the dip!

Hedgeye is an independent, conflict-free investment research and online financial media company. Click here to get a free month of Hedgeye’s newly-launched ETF product “ETF Pro.” It distills Hedgeye’s investment research down to tactical macro ETF exposures.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.