It would appear that the good old days are back as the market rebounds from last year’s slump and tech stocks are leading the way with a meteoric 20% rise. But this time may be different as the tech sector faces several risks that could send their shares crashing worse than 2018’s pullback from highs that many individual tech stocks have not fully recovered from. Those risks include an earnings plunge on the back of an economic slowdown, continuing trade tensions between the U.S. and China, and regulation and breakup of big tech firms.
From Nvidia Corp. (NVDA), Intel Corp. (INTC) and Apple Inc. (AAPL) to Facebook Inc. (FB), Alphabet Inc. (GOOG) and Amazon.com Inc. (AMZN), tech stocks will face major hurdles over the next year. “This is a deep cyclical sector that people mistake for growth,” Richard Bernstein, founder and chief executive of Richard Bernstein Advisors, told the Financial Times.
Tech Stocks are Leading Again—But for How Long?
- Technology Select Sector SPDR Fund: +20%
- S&P 500: +13%
Source: CNN Money, YTD performance as of 10:30 AM EST 03/22.
What it Means for Investors
Tech companies tend to be more vulnerable to period of poor earnings growth, Bernstein explained. Recent data from Goldman Sachs showed the consensus bottom-up forecast for earnings per share (EPS) growth in 2019 for the information technology sector at negative 2%, the worst among all sectors. “If profits decelerate in 2019 and 2020 and if we have a profit recession will this sector be immune? It won’t be,” said Bernstein.
The unresolved trade war between the U.S. and China is not helping the earnings picture. Apple saw its shares tumble last year on signs of weak smartphone demand in China, but expectations that a trade deal would be reached have stimulated a rebound. So far, no deal has been agreed on, and there are now new worries of a technology “Cold War” between the world’s two largest economies because of China’s dominance in the information- and communication-technology supply chain.
“If we are in a conflict and using infrastructure built by China, they could theoretically hit a button and shut off everything. After 30 years of saying companies should optimize supply chains and move some abroad, now we are saying it’s a security concern,” Paul Triolo, practice head of geo-technology at political risk consulting firm Eurasia Group, told Barron’s.
Then there is the question of whether big tech has gotten too big, and what regulators will do about it. Democratic presidential candidate Elizabeth Warren is making the breakup of America’s biggest tech companies a part of her campaign, which will make the regulation of the tech sector a key aspect of policy debates heading up to the election. A plan to breakup the big tech firms “would be pretty impactful, depending on how it gets done,” Lee Spelman, head of U.S. equities for JPMorgan Asset Management, told the FT.
The tech sector has become an investor favorite and there is still a lot of potential to automate even more productive processes and to take advantage of machine-learning tools, but at least in the near term, the sector will have a number of economic and political hurdles to overcome.