Who knows? JPM speculates.
We have argued last October that one should be buying back Tech sector, following a year of sharp underperformance, and given our view that US long yields have likely peaked at that point. The question is will Tech keep driving the market higher.
So far ytd, S&P500 is up 7%, but ex-Tech this stands at just 2%. Threequarters of market gains this year stem from Tech sector. FAANG is up as much as 26% ytd. In Europe, the dispersion in performance is also stark, with SX8P up 18% ytd.
We continue to believe that Tech will be trading better this year than it did last, but at the same time, think that recent Tech run is getting stretched, in absolute terms. It is looking overbought, close to all-time highs, with RSIs that are nearing elevated territory.
Valuations of the sector are up meaningfully from last October, with FAANG P/E back at 1 standard deviation expensive. Globally, Tech P/E relative is closing in on 20 year highs – middle chart.
Our call is that bond yields will be down further from here, but Tech bounce appears to have over-discounted that now – bottom chart. In addition, the clear and rising risk is that the Fed does not deliver on market expectations for cuts in 2H of the year. Real rates could stay higher, with Tech inversely correlated to them. Big picture, for the overall equity market we think that declining bond yields should not be helping stocks anymore, as bonds-equities correlation is likely to change, back to an inverse one, nor should this be helping Technology in absolute terms anymore.
With respect to the earnings outlook, consensus expectations are for the Technology sector to expand its profit margins by as much as 140bp next year, the largest increase of all sectors, and which would put it at new all-time highs. We see risks to this, especially if the economy weakens into a downturn.
Within Tech, we argued that unprofitable parts will not perform, with our more positive stance on quality, good cash flow parts. We continue with this view. Non-profitable Tech and Fintech are underperforming by 10- 20% since October, even as they are getting more attractively valued. Semiconductors are seeing higher inventory, and potentially weaker pricing.
In conclusion, we do not advocate to be short Tech, and still think the sector will be trading better than last year, relative to the market, but think that its absolute run is getting stretched. Within the sector, we maintain the preference for Quality, lower multiple part. In general, we believe that positioning in pure Defensive plays – where we have recently advised to add to them – such as Telecoms, Utilities, Staples and Healthcare, could be the best place to be in over the next months.
The full text of this article is available to MacroBusiness subscribers
