Information technology sector overview
The tech sector has rallied some after the recent perceived easing of trade tensions. However, there are still risks and the longer the tariff dispute lasts, the more potential for tech to struggle.
Market outlook for the information technology sector
The tech sector has rallied a bit following the G20 meeting between China and the U.S., where there was some perceived softening in the trade standoff between the two nations. The tech sector gets over half of its revenue from foreign sources, according to Strategas, making it seem more vulnerable to trade disputes. For now, we are keeping our marketperform rating on the group, and we still think businesses largely need to upgrade tech resources, which should help support the group.
We still like technology, but remain a bit concerned in the near term about some negative factors facing the sector—resulting in us suggesting investors not look to “load the boat” on this recent rally. Concerns about slowing global growth, as mentioned, appear to be ramping up and could negatively affect the group, while further trade dispute escalation with China could also weigh on the sector, as we saw recently. Additionally, although we still believe in the need for companies to expand their spending on capital improvements, especially in the technology area, we are concerned that trade concerns may delay some of that spending.
However, the U.S. consumer now seems to us to be willing to spend more on technology but consumer confidence has softened a bit, perhaps reflecting trade concerns, with the Conference Board's Consumer Confidence Index® falling to 121.5 in June. This still-elevated but softer confidence should help support the tech sector and leaves us still positive on the group, but with a bit more caution from our point of view.
Although we’ve been waiting for a move higher in capital spending for some time, we are encouraged by the June National Federation of Independent Business (NFIB) survey that showed capital spending plans for small business remain elevated but softened a bit, while overall capex plans have declined some according to data compiled by Strategas Research.
Balance sheets in the information technology sector appear solid, with large cash balances and relatively low debt. In our opinion, this enables the group to pursue mergers and acquisitions that might help performance by removing competition and consolidating expenses but those may be delayed by uncertainty surrounding trade. Additionally, we have seen tech sector companies increase their dividend payments, which may become a larger part of total equity return in the near term, while they have also increased share buybacks, which helps to reduce available shares to be purchased.
So we aren’t overly negative or positive on the group as we think that, for now, the risks are balanced with the return potential and believe that a neutral rating is appropriate for the time being.
Factors that may affect the information technology sector
Positive factors for the technology sector include:
- Increased technology spending: With productivity relatively weak, companies should look to technology upgrades to improve efficiency. Capital expenditures have been below trend for several years, and a return to more normal spending levels would boost the sector.
- Wage increases: Increasing wages, including raising the minimum wage in various areas, could push companies to turn to technology to replace increasingly expensive human workers.
Negative factors for the technology sector include:
- Increasing global competition: Competition, especially from areas with low labor costs, will likely continue to compress profit margins.
- Increased regulation: There is an increased risk, in our view, of some potentially damaging regulation, which could affect revenues and increase costs in certain areas of the tech sector.
- Trade disputes: If trade conflicts continue to escalate, it could raise costs for American producers and prices for consumers.
- Capital spending delays: If those same trade disputes lead to companies again delaying capital spending plans, it would likely be detrimental to portions of the tech sector.
Clients can see our top-rated stocks in the information technology sector.
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