Tech Stocks’ Growth Engine Faces a Big Slowdown

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. )

Technology stocks could be set to stumble as earnings growth is seen having a material slowdown in 2019, according to data from S&P Dow Jones Indices. A slowdown in earnings could lead to the stocks in the group falling as earnings multiples may need to adjust lower. Since July of 2016, using the Technology Selector Sector SPDR ETF (XLK) as a proxy, stock shave climbed by over 48%, compared to the S&P 500 which has risen by 24%. 

The outperformance in the group was led higher by soaring earnings growth in 2017, with the S&P 500 Information Technology Sector earnings climbing by over 33%. While 2018 earnings estimates are forecasted to rise by 24% to $62.84. But the outlook for 2019 grows dim, with growth expected to slow to only 9.6%, making it one of the slowest growing sectors in the S&P 500, behind Consumer Discretionary, Industrials and Financials. (For more, see also: Big Tech Stocks Poised to Rise in 2018 on Earnings.)

^SPX data by YCharts

Slowing Growth Outlook

According to the S&P Dow Jones, the technology sector earnings are expected to climb by 9.6% in 2019 to $68.88, leaving the group trading at approximately 16.75 times 2019 earnings estimates. But even the S&P 500 is expected to grow faster, at 10.5%, while trading at 15.3 times 2019 estimates of $172.49. It leaves the sector vulnerable as investors are paying above market multiples for below market growth. 

Other Opportunities

But sectors such as consumer discretionary are seen having earnings growth of nearly 13.6% in 2019, and is trading around 17.8 times 2019 earnings estimates of $45.69. While Industrials are expected to grow by 11.9% in 2019, and trades around 15.4 times 2019 estimates of $40.23. But the cheapest sector of the ones mentioned are the Financials, with earnings expected to grow by 11.6% while trading at only 11.9 times earnings estimates of $38.57.

Not Cheap Enough

Historically, the technology stocks aren't presently cheap but aren't overly expensive either, and that might not make them attractive to investors.  Given the growth outlook, investors may choose to look to other sectors for opportunities, such as Financials, which are trading at historically cheap earnings multiples over the past five years. 

The technology sector had the benefit of strong earnings growth, helping to drive its share price higher. But if those earnings slow as much as forecasted currently, then investors may start turning elsewhere to find growth opportunities. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.