The Information Technology sector is vulnerable to trade disputes, as it receives significant revenue from foreign sources.¹ The sector’s fortunes have fluctuated this year as hopes for a U.S.-China trade deal rose or faded.
We still like the Information Technology sector’s prospects, but remain concerned about some negative near-term factors, including the trade war. On the positive side, capital expenditures have been below trend for several years, and a return to more normal spending levels would boost the sector. Rising wages, including an increased minimum wage in some U.S. cities and states, could accelerate this trend, as companies may turn to technology to replace increasingly expensive human workers. However, trade policy uncertainty may delay some of that spending. Concerns about slowing global growth also could negatively affect the sector.
Meanwhile, U.S. consumers seem willing to spend more on technology. Consumer confidence generally has remained strong, despite trade concerns. Balance sheets in the Information Technology sector also appear solid, with large cash balances and relatively low debt. In our opinion, this enables the group to potentially pursue mergers and acquisitions that might help performance by removing competition and consolidating expenses. Meanwhile, Information Technology sector companies have increased dividend payments, which may become a larger part of total equity return in the near term, while also increasing share buybacks, which helps to reduce the supply of available shares and boost prices.
We believe that the sector’s risks currently are balanced with its return potential, and that a marketperform rating on the Information Technology sector is appropriate for the time being.
¹ Source: S&P Dow Jones Indices, S&P 500 Foreign Revenue Exposure Index (SPXFRUP), as of 8/30/2019.
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
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