Concerns over regulatory scrutiny and possible EU taxes pressured mega-cap tech names on Monday, with ongoing political risks also playing a role. The tech-heavy Nasdaq suffered its largest drop in more than five weeks (-1.8%), helping drag the S&P 500 down by 1.4%.
Despite the market noise, nothing in the sell-off changes our positive outlook for US and global equities:
- Monday's broad-based US sell-off did not spur a major rotation into defensive sectors, suggesting the tech sector may have simply risen too far, too fast this year. Going into Monday, it was up 10.5% on the year and had outperformed the broader market by more than 700 basis points. While regulatory concerns with Facebook triggered the sell-off, other firms with little regulatory overhang also sold off.
- Despite regulatory pressures, the fundamental backdrop for internet names and the tech sector remains intact. Secular growth drivers (online advertising, cloud, e-commerce, cybersecurity) and improving enterprise spending should support profit growth. We expect 1Q tech sector profits to rise by 20%+ for the fifth consecutive quarter. US tax reform should help the broader market grow 1Q earnings by around 20%, too.
- Political headlines likely contributed to the market slide as US-Sino trade tensions continue to simmer. While trade-war risks are elevated, we still see as our base case a combination of targeted tariffs and bilateral trade negotiations that have no significant impact.
Despite headline concerns leading to increased market volatility, the fundamental backdrop still supports equities globally, in our view. We remain overweight global equities.