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Trouble in the Tech Sector?

As tech goes, so goes the market—or so it would seem. After all, information-technology companies account for roughly a quarter of the S&P 500® Index.

But several of these stocksnamely, Facebook, Twitter and Alphabet (Google’s parent company)have recently found themselves in regulators’ crosshairs because of concerns about the privacy of user data. Facebook, in particular, has drawn unwanted attention following reports that one of its apps recorded users’ call and message histories—and that Cambridge Analytica, an outside company, improperly accessed the data of millions of users.

Such revelations triggered an investigation by the Federal Trade Commission, along with concerns that the social media company’s troubles could spread to the rest of the tech sector. But how likely is that to happen, and how should investors respond?

Beyond FANG

Although Facebook, Amazon, Netflix and Google tend to garner the lion’s share of attention, it’s worth noting that these so-called FANG stocks aren’t representative of the tech sector at large. Indeed, the Global Industry Classification Standard (GICS®) will move Facebook and Alphabet from the Information Technology sector into its new Communication Services sector in late September (see “Ch-ch-changes,” below). Meanwhile, Amazon and Netflix were never considered technology companies to begin with: They’re both part of Consumer Discretionary—though Netflix, too, will soon relocate to Communication Services.

In truth, the tech sector covers a wide array of technology-related stocks—including makers of mobile phones, personal computers, semiconductors and software—and its overall fundamentals appear promising.

In April, for example, the cash-rich Information Technology sector boasted the lowest long-term debt-to-equity ratio of all 11 sectors. In theory, this would leave Information Technology companies well positioned to pursue mergers and acquisitions that might eliminate competition and consolidate expenses.

In addition, we have seen such companies increase their dividend payments over the better part of a decade (see “Promising payouts,” below), a sign of fiscal health that’s likely to be further bolstered by the effects of the 2017 Tax Cuts and Jobs Act, which boosts after-tax profits.

The overall economic picture also looks supportive. For example, the Business Roundtable Q2 2018 CEO Economic Outlook Index, which measures CEOs’ projections for spending and hiring, indicates that 61% of respondents expect to boost capital spending during the next six months (the survey was conducted in May). In last year’s survey, by comparison, fewer than 50% of CEOs said they expected to increase such spending. Meanwhile, consumer confidence in May reached a 17-year high, according to the Conference Board Consumer Confidence Index®.

Spread the wealth

We believe it’s important to maintain some exposure to each of the 11 GICS sectors. After all, today’s top sector can be tomorrow’s also-ran. Information Technology, for example, led the other 10 sectors in 2009 with a return of 61.7% but had come in near the bottom of the pack just one year earlier, with a return of –43.1%.

Generally speaking, all investors should pay attention to their asset allocations and consider taking profits in positions that are overweight. However, we currently see no fundamental change to the majority of the tech sector and continue to hold our Outperform rating.

What You Can Do Next

Looking to add tech stocks to your portfolio? Clients can log in to view Schwab’s top-rated stocks in the IT sector.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market 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.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results.

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.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

Companies within the information technology sector may be significantly affected by technology evolution and product obsolescence, changing consumer tastes and spending, economic fluctuations and other factors.

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

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

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

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.

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