Tech stock rally isn’t out of juice just yet, analysts say

Market watchers remain bullish on technology shares continuing to outperform major indexes amid pandemic.

  • By Michael Wursthorn,
  • The Wall Street Journal
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

Shares of technology companies have leapt ahead of the broader market, and analysts don’t see that changing soon.

Tech stocks in the S&P 500 (.SPX) have rallied nearly 16% this year, even after Monday’s 2.1% slump for the group, fueling a logic-defying market rebound that has largely pulled the major U.S. stock indexes out of their pandemic-induced slump. The S&P 500 is off 2.3% in 2020.

Despite a surge in coronavirus cases across parts of the U.S. and the potential for a fresh round of state lockdowns, some analysts say it still isn’t too late to catch the rally.

Brian Belski, chief investment strategist at BMO Capital Markets, sees no reason tech stocks won’t continue to outperform over the next 12 to 18 months. For starters, tech stocks remain a bulwark against some of the economic damage brought on by the pandemic, he said, adding that software is particularly attractive, including Adobe Inc. (ADBE), Microsoft Corp. (MSFT) and Salesforce.com Inc (CRM).

Adding to the backdrop, earnings growth has shown signs of recovering faster than most other sectors, a key driver of stock prices. Tech’s blended earnings growth, which takes into account profits over the past 12 months and the next 12, stands at 5.8%, second only to the S&P 500’s health-care sector, Mr. Belski said.

Tech’s earnings growth is near levels last seen during the start of the prior bull market in 2009, he added.

“We believe tech stocks could still go another 20% to 30% higher,” Wedbush analyst Daniel Ives wrote in a Thursday research note. “While fears of a second wave and a soft macro will cause volatility over the coming months, especially with earnings season around the corner, we remain firmly bullish on tech for the rest of the year.”

There are some obvious concerns that investors have to work around, though.

Tech’s run-up has pushed the sector’s weighting in the S&P 500 to 27.5%, nearing a 20-year high that gives the group considerable heft in the broad index, said Nancy Tengler, chief investment officer of Laffer Tengler Investments. That alone might alarm some investors. But Apple (AAPL), whose shares have risen 30% this year, and Microsoft, up 31%, represent a significant chunk of that weighting and could warrant some trimming from portfolios.

“We have been trimming our holdings as the stocks appreciate to ever bigger portions of our portfolios,” Ms. Tengler said. But she added that with fewer publicly traded companies than ever before, there are fewer stocks benefiting from the Fed’s wave of liquidity.

“We don’t expect this trade to end anytime soon,” she added.

At BMO, the firm continues to recommend investors buy tech stocks, but adds that their hefty valuations and influence over the S&P 500 should make investors more picky. Some measures of tech’s values are at their highest since 2002 and are continuing to climb, BMO said.

“The key for tech, in our view, is stock selection,” said Mr. Belski.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2020 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.