By Jason Draho, Head of Tactical Asset Allocation Americas, and Edmund Tran, Equity Strategist Americas
The markets were on course for another bad Monday before closing off their lows, with the S&P 500 down 1.4% on the day. A litany of concerns triggered this weakness, led by the tech sector, as concerns over regulatory scrutiny and possible European Union taxes pressured mega-cap names within the space. Political risks also played a role. But through all these factors and market noise, nothing in today’s sell-off changes the positive fundamental outlook for U.S. (and global) equities.
Monday's broad-based sell-off saw no strong rotation into defensive sectors, signaling the possibility that the tech sector performance simply went too far, too fast in the first few months of the year. Going into Monday, the tech sector was up 10.5% year-to-date and was outperforming the broader market by over 700 basis points. While the sell-off in the tech sector began with regulatory risks pressuring Facebook and related internet names, other industry groups within the sector not impacted by the regulatory overhang sold off in unison.
Regulatory pressures for mega-cap internet tech names will continue to persist, but the fundamental backdrop for the internet names, as well as the rest of the sector, remains intact. Secular growth drivers (online advertising, cloud, e-commerce, cybersecurity) and improving enterprise spending trends should continue to support corporate profits. For the upcoming first-quarter earnings season, tech sector profits are expected to grow by 20%+ for the fifth consecutive quarter. On the back of tax reform, the broader market is also expected to grow earnings in 1Q by around 20%.
There was no shortage of political headlines this weekend that contributed to the market slide, in our view. Friction between the Trump administration and the ongoing Mueller investigation continued, as it was reported that dismissed FBI deputy director Andrew McCabe was cooperating with the probe. Additionally, trade tensions with China remain top-of-mind for investors. US trade associations across various industry groups urged against the imposition of tariffs on China. While trade-war risks are elevated, our base case remains a combination of targeted tariffs and bilateral trade negotiations with no significant impact.
The bottom line: Despite headline concerns leading to increased market volatility, we view the fundamental backdrop as still supportive of equities. We remain overweight global equities. Furthermore, we reiterate that market sell-offs such as these present opportunities for investors to review and rebalance their portfolios.