Red-hot tech stocks could be derailed by the Fed

The so-called FAANG group — consisting of Facebook, Apple, Amazon, Netflix, and Google — has traded inversely to 10-year Treasury yields for the better part of the past decade, according to data compiled by Credit Suisse.

So if the Fed continues to raise interest rates as planned, those high-flying tech stocks are likely to come under pressure, at least if history is any indicator. And that would threaten the torrid streak of gains that has led major indexes to new highs.

The FAANG group has surged by 25% in 2017, with each company climbing by more than 20% over the period. That's more than triple the return of the S&P 500 and a full 9 percentage points more than the already tech-heavy Nasdaq 100.

"A move higher in interest rates in the 2H17 could be a challenge for the group from a trading/sector rotation perspective," Credit Suisse's chief US equity strategist, Lori Calvasina, wrote in a client note.

The same inverse dynamic is true for the more refined internet retail space, which consists of the FAANG members Amazon and Netflix but isn't categorized as tech. Rather, the companies are both part of the consumer discretionary sector, according to S&P classifications. As such, the consumer space could also come under pressure as the Fed continues to tighten, Credit Suisse says.

The potential downside in both areas could be jarring for heavily exposed fund managers, who have piled into the tech and internet retail trades with abandon. That has resulted in overcrowding — something that is fine on the way up but can lead to a swift and painful comeuppance at the first sign of turbulence.

Sell-side analysts seem to have realized these possible perils, however, and have slightly scaled back bullish sentiment around FAANG. Given this shift in guidance, it's plausible that investors will follow suit and get more defensive, especially with an interest-rate reckoning on the horizon.

Further, Credit Suisse points out that valuations for FAANG look reasonable. The ratio of FAANG's price-to-earnings ratio to that of the broader Russell 1000 is close to its lowest since 2003, according to the firm's data.

Regardless of what the future holds, it's clear that some questions are emerging around these mega-cap tech titans, which may not be the worst thing in the world. After all, if stock market history has shown anything, it's that a dose of skepticism can be healthy.