Tech wreck? Correction? Higher volatility?Contributor David Lebovitz
In sports, teams often take time between the first and second half of a contest to discuss what they need to do in the second half to improve their performance. Investing is no different, so with the first half in the books, we wanted to address some of the top questions we have received during the past few weeks, and provide some insight on what we think could happen in the second half of 2017.
Is the sell-off in tech a cause for concern?
Some investors are concerned that stock market gains this year have been primarily driven by a few large technology stocks, and that the recent weakness in this sector could lead to a broader drawdown for the market. While it is true that the 10 largest stocks have been responsible for nearly 36% of the S&P’s year-to-date return, remember that in 2015, a handful of stocks were responsible for all of the S&P 500’s return! Additionally, the top 10 names account for a much smaller share of the index than was the case during the tech bubble. In 1999, the 10 largest stocks in the S&P 500 made up nearly 30% of the index - today they only account for 19%, just below the long-term average of 20%.
More important, however, is the fact that technology sector fundamentals remain supportive. Although relative and absolute valuations have risen, they are below the levels seen both prior to the financial crisis and during the tech bubble. Also, earnings growth looks set to remain robust, with Standard & Poor’s forecasting that the technology sector will see earnings grow by nearly 30% in 2017. Finally, from a behavioral perspective, investors seem to be viewing technology – and growth stocks more broadly – in a slightly different light. Investors have historically bought growth stocks when confidence is high, but during the past few years, growth stocks have been purchased for their ability to generate earnings and revenue growth despite a more moderate economic backdrop. Furthermore, the correlation between growth stocks and interest rates, which has historically been positive, has recently moved into negative territory, indicating that investors believe buying growth stocks is actually a way of playing defense in the current environment. This combination of sound fundamentals and an attractive behavioral component suggests that while technology shares may not be immune to a pullback, a more serious decline in prices seems unlikely.
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.