Can tech stocks keep leading the market?

Our portfolio managers see reasons why tech may continue outperforming the market.

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Key takeaways

  • Tech stocks have been among the strongest performers in a long-running bull market, and history suggests they still have room to run.
  • Fidelity portfolio managers believe that opportunities exist in a variety of areas within the tech sector including cloud computing and artificial intelligence.
 

As innovation in information technology continues to transform business, government and everyday life, technology companies continue to rank among the best-performing US stocks. Over the past year, tech stocks─despite some sharp periodic pullbacks─have risen 31% compared with the S&P 500's 18% increase.

Fidelity Sector Strategist Denise Chisholm says history suggests it’s not unreasonable to believe that tech can continue to lead the way. "Tech's outperformance is modest by historical standards," she says. "It's significantly lower than the average annual outperformance of market-leading sectors dating back to 1962 when the average top-performing sector outpaced the broader market by approximately 20%." Chisholm also points out that the tech sector's current forward P/E ratio is relatively low by historical standards and the industry's profit margins have surpassed prior peaks.

Fidelity fund managers also see signs that point to continued strong performance from tech stocks. Recently, Viewpoints checked in with 3 who know the tech sector well to see where they are focusing their attention.

Sonu Kalra, Fidelity Blue Chip Growth Fund (FBGKX)
I still like tech stocks because of the cloud and AI

Long-term trends from the cloud to artificial intelligence (AI) and machine learning support the information technology sector. The fund is overweighted in tech, which comprises 45% of fund assets as of June 29. Today’s biggest tech trend is cloud (or remote) computing, and companies such as Salesforce (CRM) and Amazon (AMZN) have seen increasing sales due to the adoption of cloud technologies. I also like semiconductor manufacturers, some of which can benefit from AI and machine learning. Among chipmakers as of the end of June, the fund holds Nvidia (NVDA) a company with ties to machine learning, as well as wireless chipmaker Broadcom (AVGO), which also designs chips for AI applications. It’s not a huge part of Broadcom’s business yet, but I see potential. One more reason I’m overweight the sector is strong GDP growth and capital spending in the US, which I believe should provide a healthy backdrop for tech spending.

Charlie Chai, Fidelity Select Technology Portfolio (FSPTX)
Software remains at the heart of the ongoing digital revolution

Businesses in all industries must use data more strategically or be left behind. That's why the fund is heavily invested in data-mining software firms. These companies represent about 36% of the fund as of June 29, a larger share than any other industry and up from roughly 19% at the start of 2018. Microsoft (MSFT), whose Azure cloud services help customers forecast demand and optimize inventory, is a notable overweighting as of the end of June. As of the same date, the fund is also overweight cloud-computing software provider Salesforce (CRM). Salesforce's Einstein Analytics software uses internal and external data sources to provide customers with sales and marketing insights. Even human resource departments are moving in a data-driven direction so the fund is overweight Ultimate Software Group (ULTI), whose cloud-based software helps mid-sized companies modernize functions including benefits management and onboarding. These software firms all help customers become meaningfully more efficient and they're part of what I believe is an enduring trend.

Will Danoff, Fidelity ContraFund (FCNTX)
The big move in growth stocks the past 18 months has not tempered my outlook

Growth stocks have had a huge run since the end of 2016, but I remain bullish on growth-oriented companies that are gaining market share with innovative products and services. As of June 29, the technology-heavy portfolio includes overweights in Facebook (FB), Adobe Systems (ADBE) and Salesforce (CRM), along with Amazon (AMZN) and Netflix (NFLX), two companies I consider tech leaders even though they are classified within other sectors.

While many market observers look to the past and predict a decline for growth stocks, I look ahead and see many companies that have the opportunity and resources to grow much bigger in the next five to 10 years. My long-standing investment philosophy is that stocks follow earnings. If a company's EPS doubles in the next five years, then most likely its underlying shares also will double in value. Looking ahead, I expect earnings to rise meaningfully as the US economy stays strong, confidence rises, and US tax reform helps both businesses and consumers.

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