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Schwab Sector Views

Schwab Sector Views: Tech Wreck … or Speed Bump?

Key Points
  • The technology sector has had a rough month, after a long successful run.

  • We don’t see a lot of fundamental reason for the selling, but a pullback should help to relieve a bit of froth that had built up—especially among the leader stocks.

  • This is a reminder not to get too concentrated in any one area; however, we remain optimistic on the tech sector and continue to rate it “outperform.”

Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.

Time to trash tech?

To say that the technology sector has had a rough month would be putting it mildly. After leading the market higher over the last year—and in fact it remains the leading sector performer over the past 12 months—it is the worst-performing group during the past month.

Tough run for tech recently

Past performance is no guarantee of future results.

We had warned investors that there could be some near-term bumps in the road, as some froth appeared to have built up, especially among some of the leaders. However, we didn’t see a pullback to this magnitude coming. The “hits” kept coming, from concerns about privacy issues and regulatory consequences from Facebook, to worry about self-driving cars and on to tweets from President Donald Trump regarding Amazon. (One quick reminder, by the way: Amazon is not a member of the technology sector. It is a consumer discretionary stock, but you wouldn’t know that from most media coverage, and the tech sector appeared to get caught in the washout.) The common thread in all this isn’t that the fundamental backdrop for the tech sector has changed to any great degree—it’s that the selling appears to be more of an emotional, fear-based response, and to us that doesn’t seem like a productive way to make investing decisions.

Is this a potential opportunity?

Of course I would have loved to be able to tell you to quickly sell some tech before all of this upheaval started, but looking in the rearview mirror isn’t typically a profitable strategy either. Looking forward, I would say that this pullback has created a potential opportunity for investors who hadn’t gotten on the tech train to add to positions. That doesn’t mean the selling is over—there likely will be bumps in the road ahead, as well—but as we look over the next six to 12 months, we see good prospects and solid fundamentals.

Earnings season is just beginning and First Call is estimating that tech sector earnings will rise 23.4% versus the same period a year ago, above the estimate for the entire S&P 500® index of 18.4%. Additionally, it appears that the long-awaited rise in capital expenditures may finally be coming to fruition. The National Federation of Independent Business (NFIB) said 58% of its members in March reported capital outlays, down a bit from February’s impressive reading (the highest since 2004), but still at a healthy level. Twenty-six percent of NFIB members planned capital expenditures during the next few months.

Capex plans and actions trending higher



Additionally, both Institute of Supply Management (ISM) surveys—manufacturing and non-manufacturing—remained in strongly optimistic territory in March, at 59.3% and 58.8% respectively. The new orders components, although easing slightly, also remained well above the 50% mark that separates contraction from expansion.

We also have the tailwind of fiscal policy. The majority (estimated at about 70% by Strategas Research) of American consumers have gotten a tax cut that gives them more money to spend, while companies received an expanded ability to accelerate depreciation of purchased assets into the year of purchase, which should help to spur capital spending in our view. Meanwhile, according to Bloomberg, the IRS released some opinions that should help to open the door to repatriating cash that many tech companies are holding overseas. Additional cash on hand typically opens the door to further share buybacks, increased dividend payments, and increased capital expenditures, all of which should benefit the tech shareholder, in our opinion.

Risks overblown?

That’s not to say there aren’t risks. Those always exist and now they appear to be modestly elevated—but perhaps also modestly overstated, in our view. It was interesting to watch tech fall on the announcement of Chinese tariff proposals on U.S. goods. First, they were merely proposals at this stage. Second, according to data compiled by Cornerstone Macro, we don’t actually send a lot of tech products to China. And third, both sides seemed to avoid the biggest areas of tech interdependence, such as phones and computers, when announcing the potential targets of new tariffs—that doesn’t mean it isn’t a risk, but perhaps one not worth panicking about.

And regarding the above-mentioned Facebook and Amazon (not a tech stock) issues: We aren’t going to comment on those specific companies, but the concerns largely involved the possibility of government intervention that could crimp the operations of both companies. While not dismissing that possibility, we also believe the reaction was overdone. With a seemingly more business-friendly environment currently in place in Washington and mid-term elections coming up soon, we have doubts that potential consumer-damaging regulations will be put in place on two companies that appear popular with the voting public.

In conclusion

Bumps in the road are to be expected and some of the froth that had built up among segments of the tech sector appears to have been worked off, providing an opportunity for investors willing to deal with a bit of bumpiness (and a reminder not to get overly concentrated in any one segment of the market). Risks have risen, but we don’t think there’s another sector that offers the broad exposure to both international and domestic customers as well as both businesses and consumers, which should all benefit from a growing economy. Therefore, we continue to hold an outperform rating on the technology sector and suggest investors be patient and look to add on the pullback as needed.

Schwab Sector Views: Our current outlook


Schwab Sector View

Date of last change to Schwab Sector View

Share of the
S&P 500 Index

Year-to-date total return as of 03/27/18

Consumer discretionary





Consumer staples















Health care










Information technology










Real estate















S&P 500®  Index (Large Cap)





Source: Schwab Center for Financial Research and Standard and Poor’s as of 03/31/18.

Clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations.

What is Schwab Sector Views?

Schwab Sector Views is our three- to six-month outlook for 11 stock market sectors, which are based on the 11 broad sectors of the economy.

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 rest of the market.
  • Underperform: Likely to perform worse than the rest of the market.
  • Marketperform: Likely to track the broad market.

How should I use Schwab Sector Views?

Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor’s 500 allocations to each sector, listed in the chart above, as a guideline.

Investors who want to make tactical shifts in their portfolio can use Schwab Sector Views’ outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.

Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. When it’s time to make adjustments, Schwab clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks.

What You Can Do Next

To discuss how this article might affect your investment decisions:

4 Ways to Play Defense
Materials Sector Rating: Marketperform

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month.

The S&P 500® Information Technology Index is comprised of those companies included in the S&P 500 that are classified as members of the GICS® information technology sector

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production, inventories, new orders and supplier deliveries.

The ISM Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM).

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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