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Trouble in the Tech Sector?

By

Brad Sorensen

photo
CFA, Managing Director of Market & Sector Analysis, Schwab Center for Financial Research

Brad Sorensen heads market and sector analysis for the Schwab Center for Financial Research and writes for several Schwab publications. He is a member of Schwab's Investment Strategy Council.

Before joining Schwab in 2004, he was a senior analyst at AMG Guaranty Trust, where he designed portfolio strategies for high-net-worth individuals. Sorensen graduated from the University of Colorado with a bachelor's degree in finance and master's degrees in business administration and finance. He is a Chartered Financial Analyst charterholder.

November 28, 2018

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2 years 1 month
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Submitted by Site Factory admin on Wed, 11/28/2018 - 14:03

As tech goes, so goes the market—or so it would seem. After all, information-technology companies account for roughly a quarter of the S&P 500® Index.

But several of these stocksnamely, Facebook, Twitter and Alphabet (Google’s parent company)have recently found themselves in regulators’ crosshairs because of concerns about the privacy of user data. Facebook, in particular, has drawn unwanted attention following reports that one of its apps recorded users’ call and message histories—and that Cambridge Analytica, an outside company, improperly accessed the data of millions of users.

Such revelations triggered an investigation by the Federal Trade Commission, along with concerns that the social media company’s troubles could spread to the rest of the tech sector. But how likely is that to happen, and how should investors respond?

Beyond FANG

Although Facebook, Amazon, Netflix and Google tend to garner the lion’s share of attention, it’s worth noting that these so-called FANG stocks aren’t representative of the tech sector at large. Indeed, the Global Industry Classification Standard (GICS®) will move Facebook and Alphabet from the Information Technology sector into its new Communication Services sector in late September (see “Ch-ch-changes,” below). Meanwhile, Amazon and Netflix were never considered technology companies to begin with: They’re both part of Consumer Discretionary—though Netflix, too, will soon relocate to Communication Services.

In truth, the tech sector covers a wide array of technology-related stocks—including makers of mobile phones, personal computers, semiconductors and software—and its overall fundamentals appear promising.

In April, for example, the cash-rich Information Technology sector boasted the lowest long-term debt-to-equity ratio of all 11 sectors. In theory, this would leave Information Technology companies well positioned to pursue mergers and acquisitions that might eliminate competition and consolidate expenses.

In addition, we have seen such companies increase their dividend payments over the better part of a decade (see “Promising payouts,” below), a sign of fiscal health that’s likely to be further bolstered by the effects of the 2017 Tax Cuts and Jobs Act, which boosts after-tax profits.

The overall economic picture also looks supportive. For example, the Business Roundtable Q2 2018 CEO Economic Outlook Index, which measures CEOs’ projections for spending and hiring, indicates that 61% of respondents expect to boost capital spending during the next six months (the survey was conducted in May). In last year’s survey, by comparison, fewer than 50% of CEOs said they expected to increase such spending. Meanwhile, consumer confidence in May reached a 17-year high, according to the Conference Board Consumer Confidence Index®.

Spread the wealth

We believe it’s important to maintain some exposure to each of the 11 GICS sectors. After all, today’s top sector can be tomorrow’s also-ran. Information Technology, for example, led the other 10 sectors in 2009 with a return of 61.7% but had come in near the bottom of the pack just one year earlier, with a return of –43.1%.

Generally speaking, all investors should pay attention to their asset allocations and consider taking profits in positions that are overweight. However, we currently see no fundamental change to the majority of the tech sector and continue to hold our Outperform rating.

Looking to add tech stocks to your portfolio? Clients can log in to view Schwab’s top-rated stocks in the IT sector.