Technology has been an important driver in this year’s equity rally. The S&P 500 IT sector is up 27% year-to-date, making it responsible for around a third of the broader index's 17.5% gain. Such strong performance may raise concerns about the sustainability of the rally, and on 30 April the Nasdaq dropped 0.8% after Google parent company Alphabet shed 7.5% on softer-than expected earnings.
But we remain confident in the tech sector's prospects, supported by a favorable combination of secular and cyclical drivers:
* From a macro perspective, the economic expansion is continuing, which is supportive for cyclical sectors. For example, continued economic growth should allow the semiconductor inventory overhang to improve, after recent production cutbacks.
* We expect enterprise IT spending, supportive for software demand, to remain healthy across both traditional infrastructure and modern cloud architectures. Digitizing business processes are a must in order for companies to stay competitive, illustrating the sector’s secular growth potential.
* Apple’s strong 1Q sales and earnings, with indications that iPhone sales are healthy, should help allay concerns about smartphone demand, which has been one of the weaker spots of the tech market in recent months.1Q tech earnings more broadly have been strong; with 60% of IT companies having reported, almost 90% have beaten earnings expectations. The IT sector’s premium rating is below its long-term average, even if we exclude the dotcom bubble years of 1998 to 2002. Global IT remains one of our preferred sectors, and we continue to recommend diversified investment across companies with structural and cyclical growth opportunities. The cyclical upside is driven by companies with exposure to economic growth or restructuring opportunities, while the structural upside comes from leaders in fast-growing industries such as mobile internet and cloud computing. For example, we expect the 5G addressable market to grow by 75x from 2017 to 2025, with total 5G equipment revenue reaching USD 150 billion by 2025. For more details on this trend, please read our Long-Term Investments report, “Enabling Technologies”.