CIO expect earnings to decelerate further. But while we maintain a near-term defensive stance in our positioning, adding some cyclical exposure on further signs of bottoming should reward investors in the medium to longer term.
The tech sector underperformed in 2022.
- The MSCI World IT Index fell 31.3% in 2022, versus a 19.5%decline in the broader MSCI World Index.
- Tech stocks are more vulnerable to rising interest rates, which reduces the current value of more distant profits.
- So far in 2023, tech stocks are up 5.6%, only modestly ahead of the 5.1% rise in the broader MSCI World index, as of 16 January.
But despite the decline, we still don't see valuations as cheap and earnings growth is slowing.
- Global tech sector earnings growth is expected to decelerate further, with flat growth likely in 2023 amid still lukewarm consumer demand and a deteriorating enterprise outlook.
- A cyclical downturn, FX headwinds, and higher input costs were the common thread across management guidance in the third quarter.
- And while valuations have declined from 29x to about 19x forward price-to-earnings, this is still 4% above the 10-year historical average.
So, we maintain a near-term defensive stance on the tech sector.
- Consensus estimates for the IT sector's 2023 earnings have fallen around 8% from their peak, and we expect further estimate cuts to come.
- We remain cautious on cyclical tech industries such as semiconductors, hardware, and digital media.
- But we think adding some cyclical exposure on further signs of bottoming should reward investors in the medium to longer term.
Did you know?
- After more than a decade of expanding valuations, the IT sector’s price-to-earnings ratio has declined from 29x to 19.1x, as of 16 January. But the sector still trades at a 4% premium to its 10-year average. This compares to 14.6x for the broader MSCI World Index.
- The IT segment is the most global of all S&P 500 sectors. More than 58% of its revenue comes from outside the US versus 40% for the S&P 500.
We have least preferred view on the technology sector amid pressure from higher rates, slowing global demand, and a rising risk of more earnings downgrades. Instead, we favor value stocks, particularly energy equities, and more defensive parts of the market.
Main contributors - Vincent Heaney, Christopher Swann
Content is a product of the Chief Investment Office (CIO).
Original report - Will tech continue to underperform value?, 18 January 2023.