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
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
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