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Information Technology Sector Rating: Marketperform

By Brad Sorensen

Information technology sector overview

The tech sector has led the market rally, but we don’t think investors should chase returns at this point. Corporate spending could be delayed by tariff concerns, which could affect the profitability of the group.

Market outlook for the information technology sector

The tech sector has staged a nice rebound along with the overall market as sectors viewed as more cyclical have participated in the rally to this point in the year. But we continue to view the tech sector as a bit more defensive in nature than historically seen, after the changes last year, and are looking to see if the performance characteristics of the group change over time. For now, we are keeping our marketperform rating on the group, as global growth concerns could dent recent solid performance, but we still think businesses largely need to upgrade tech resources, which should help support the group.

As such, we still like technology, but are a little more concerned in the near term about some negative factors facing the sector. Concerns about slowing global growth, as mentioned, appear to be ramping up and could negatively affect the group, while a trade dispute with China could also weigh on the group should it continue to drag on or escalate, 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. Meanwhile, consumer confidence remains relatively elevated, rising to 129.2, according to The Conference Board. This elevated confidence should help support the tech sector and leaves us still positive on the group, just not to the point of needing to load the boat.

Although we’ve been waiting for a move higher in capital spending for some time, we are encouraged by the March National Federation of Independent Business (NFIB) survey that showed capital spending plans stayed steady and remain fairly elevated.

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 on the group, but we do think, for now, that the risks are more balanced with the return potential and believe that a more 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 escalate it could raise costs for American producers and prices for consumers.
  • Capital spending delays: We continue to see signs that companies remain hesitant to increase capital investment beyond what is absolutely necessary, although there are signs that is beginning to end.

Clients can see our top-rated stocks in the information technology sector.

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.

Communications Consumer discretionary Consumer staples Energy
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Important Disclosures

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The National Federation of Independent Business (NFIB) Small Business Optimism Survey which is based on the responses of 740 randomly sampled small businesses in NFIB's membership, surveyed monthly.

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