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 prospects, but remain concerned about some negative near-term factors, including the impact of the coronavirus epidemic and ongoing supply chain issues. The phase-one trade deal between the U.S. and China, combined with a new trade pact with Mexico and Canada to replace NAFTA, have at least temporarily eased uncertainty.
However, demand fluctuations related to COVID-19 (positive for personal computers, but negative for wireless phones and capital expenditures) are compounded by supply uncertainties surrounding any residual impact from the pandemic on supply sourcing, which could reignite trade policy risks.
While valuations of technology sector are somewhat elevated, it boasts strong fundamentals relative to the other sectors. Revenues and earnings were expected to grow over the next two years, but near-term estimates have declined due to virus-related concerns—including the sharp global recession. Relative to other sectors, however, downward revisions have been mild.
U.S. consumers had been willing to spend more on technology, but consumer confidence has begun to fall significantly. There is elevated uncertainty regarding incoming data, but the unemployment rate has dramatically risen above levels seen in the 2008-09 crisis and is likely to sap demand for consumer products.
Balance sheets in the Information Technology sector appear solid, with large cash balances and relatively low debt. Companies have increased dividend payments, but there is an expectation for buybacks to slow amid the economic turmoil.
Capital expenditures have been below trend for several years, and a return to more normal spending levels would boost the sector. If one of the results of the pandemic is to partially reverse globalization, companies may turn to technology to replace increasingly expensive human workers.
The sector has lagged recently, as other cyclical sectors have taken the lead since mid-May, but longer-term momentum remain strong.
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. Keep in mind, however, that sharp volatility in the markets, earnings expectations and the economy makes assessing valuations and fundamentals difficult.
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 06/09/2020
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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