The tech sector has recently regained some ground lost in 2022.
- So far in 2023, tech stocks are up 14.9%, outperforming the 8.4% rise in the broader MSCI World index, as of 6 February.
- 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.
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 lukewarm consumer demand and a deteriorating enterprise outlook.
- So far fourth quarter earnings for the sector have been mixed, but we continue to see slowing demand for personal computers, digital advertising, and cloud spending.
- And while forward price-to-earnings valuations have declined from 29x to about 21.1x, this is still 15% 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 21.1x, as of 6 February. This compares to 15.5x for the broader MSCI World Index. And the sector still trades at an 15% premium to its 10-year average.
- 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 are least preferred 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 recover lost ground?, 6 February 2023.