Equity Strategy: Can Technology keep driving the markets higher?

Speaker: Mislav Matejka, Head of Global Equity Strategy

We argued last October that one should be buying back the Tech sector, following a year of sharp underperformance, and given our view that US long yields had likely peaked at tat 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%. FAANG is up as much as 26% ytd. We continue to believe that Tech will be trading better this year than it did last, but at the same time, think that the recent Tech run is becoming 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. Our call is that bond yields will be down further from here, but the Tech bounce appears to have over-discounted that now. 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. 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 becoming more attractively valued. 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 becoming stretched. 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 over the next months.

 

This podcast was recorded on 11 April 2023.

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