Technology shares tumbled on Tuesday, dragging the broader market lower, as ongoing data privacy issues and negative headlines about autonomous driving weighed on sentiment. The Nasdaq closed 2.9% lower and the S&P 500 declined by 1.7%, with the tech sector down by 3.5%.
Given these recent negative news developments, increased volatility and profit-taking are understandable. But the underlying fundamentals supporting tech remain strong.
- The technology sector’s secular growth prospects (cloud, e-commerce, online advertising and cybersecurity) remain intact. Investment themes like software, digital data, and the Internet of Things provide strong growth potential.
- Historically, business spending on technology tends to be correlated with corporate profits, with a 6–12 month lag. Last year's global profits acceleration should drive enterprise spending this year.
- While US tech valuations have increased to 19x next 12-month earnings, they are not expensive, and nowhere close to their "bubble" heights of the late 1990s and early 2000s.
Relative valuations have moved up, however – US tech is now trading at an 11% premium to the S&P 500, in line with the long-term average, excluding the tech bubble. And tail risks, like tariffs, greater regulation and new taxes, have become more prominent. As a result, the favorable growth outlook now appears to be largely reflected in sector valuations, and we recently cut our overweight on technology within our US sector strategy back to neutral. For most investors, this means that we are still recommending a 25% allocation in US equities to tech, given its high weight in the S&P 500.