Download the Schwab app from iTunes®Close

Information Technology Sector Rating: Marketperform

What is the information technology sector?

It includes makers of software, semiconductors, personal computers; communications equipment such as mobile phones; electronic equipment; and providers of consulting and IT services.

We still like the Information Technology sector’s long-term prospects, but remain concerned about some negative near-term factors, including the risk that the narrow market leadership could dissipate—either resulting in a pullback in the overall market (led by Technology and the other highly concentrated growth sectors), or a broadening of the rally would result in the underperformance in a continued rally.

Demand fluctuations related to COVID-19 (positive for personal computers, but negative for wireless phones and capital expenditures) are compounded by supply ongoing uncertainties surrounding any residual impact from the pandemic on supply sourcing, which could reignite trade policy risks.

While valuations of technology sector are quite elevated, it boasts strong fundamentals relative to the other sectors. Revenues and earnings are expected to grow over the next two years, and earnings revisions continue to improve.

U.S. consumers had been willing to spend more on technology, but consumer confidence will be key. While the unemployment rate has declined from the extreme highs, it is likely to remain elevated, which could sap demand for consumer products.

Balance sheets in the Information Technology sector appear solid, with large cash balances and relatively low debt. But there is an expectation for buybacks to slow until a recovery is well underway.

Capital expenditures have been below trend for several years, but a return to more normal spending levels would boost the sector. If one of the results of the pandemic is to reverse the trend in globalization, companies may turn to technology to replace increasingly expensive human workers—and there are tentative signs of that already happening.

While there are many compelling reasons to favor the sector, we think that there is heightened risk that the concentrated rally in the market could broaden or even consolidate—both scenarios could lead to short-term underperformance. For the time being, we’re maintaining a marketperform rating.

Sector Overview: Information Technology

information technology

Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.  

Source: Charles Schwab, as of 09/10/2020

What do the ratings mean?

The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:

  • Outperform: likely to perform better than the broader stock market*
  • Underperform: likely to perform worse than the broader stock market
  • Marketperform: likely to track the broader stock market

 

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Information Technology sector.

 

* As represented by the S&P 500 index

Communication Services Health Care
Consumer Discretionary Industrials
Consumer Staples Materials
Energy Real Estate
Financials Utilities

 

What You Can Do Next

Utilities Sector Rating: Underperform
Materials Sector Rating: Marketperform

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

(0920-0C5Y)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.