A seven-day winning streak for the tech-heavy Nasdaq Index came to an end yesterday with a 1% fall. Fears over a global trade conflict appeared to be the reason, following President Trump’s dismissal of his pro-free trade Secretary of State Rex Tillerson, and reports he may impose severe tariffs on Chinese imports.
But the Nasdaq is still outperforming the broader S&P 500 Index on a total return basis this year, 9% to 3.8%. And we remain upbeat on the outlook for the global tech sector, as well as the US one.
- Earnings growth has remained impressive. Last quarter, 80% of tech firms in the MSCI US Index beat forecasts, with a 23% earnings growth rate for the sector overall. That compares with 71% of firms in the broader index whose earnings topped expectations.
- Valuations aren't flashing red. The MSCI World tech sector has climbed 10% this year, versus just 2% for the overall index. Despite this strength, tech valuations remain moderate by historical standards on a trailing price-to-earnings ratio of 21.5 times, versus a median since 1995 of 22.5x.
- Large segments of the technology sector would be well protected if trade tensions worsen. While a full-blown trade war isn't our base case, risks have been rising recently. Tech hardware firms could suffer if the US and China enter a cycle of retaliation. That said, US internet giants tend to have only a limited footprint in China thanks to long-standing market access restrictions.
So, we remain positive on the global technology sector, which is well-placed to continue benefiting from strong global growth.