UBS House View Weekly
No tech wreck on deck
It seemed like technology stocks were on a roll. The sector was up 22% this year through 8 June, accounting for 10 of the top 20 performers in the S&P 500, and four of the five largest US stocks by market value are in technology. But the sector suffered a setback last week. On seemingly no news, technology underperformed the broader market last Friday by the biggest margin since October 2008.
We do not consider this cause for concern for either the tech sector or the US market more broadly:
Tech valuations are not unreasonable. Valuations have expanded over the past few years, but at 18.5 times forward consensus earnings they are nowhere near their 2000 peak of 55.1x. Relative to the S&P 500, the sector currently trades at just a 5% premium, compared to its 20-year average premium of 25%.
Fundamentals are solid. Most cyclical and longer-term earnings fundamentals for the tech sector appear healthy. Enterprise spending is accelerating as companies position for cloud architectures. Internet advertising
IT sector doesn’t look overvalued relative to the index
continues to take share from traditional media platforms. And while end-market penetration of smartphones appears mature, most stocks linked to this market already trade at a 15% valuation discount to the sector. Overall, we expect earnings growth of close to 10% this year and next for both the tech sector and the S&P 500 to prolong the bull market in US equities.
Tech isn’t the only game in town. Today tech represents 22.6% of the S&P 500, compared to nearly 35% in 2000. Nine of the 11 S&P 500 sectors this year have generated a total return of greater than 5%, indicating that the market’s performance is broad-based.
From our viewpoint, the sell-off stems more from a rotation into lagging market segments than concerns about sector fundamentals. After all, the US equity market remains close to its all-time high despite the technology reversal.
Through early June, growth stocks outperformed value stocks by over 11 percentage points this year – the largest performance gap between the two styles during the first six months of the year since 2009. We recently upgraded US large-cap value stocks as we believe this lagging market segment now offers more attractive return prospects than growth over our six-month tactical time horizon.
Global Chief Investment Officer
Head of Investment Strategy
Wealth Management Americas
Fears of a tech bust triggering a bear market in US stocks appear unwarranted. Sector valuations are far from the extremes reached 15-20 years ago, and the outlook for large-cap technology companies appears bright. While
we think a continued rotation into value stocks appears likely in the next six months, improving fundamentals for sectors like energy and financials are likely to fuel it rather than weaker tech prospects.