Market Perspective – Tech sector growth leadership unlikely to continue

Market Perspectives

August 11, 2021

From mid-May until early-August, the technology sector outperformed the S&P 500 by a margin of about 18% to 9%. Tech’s strong performance also bolstered the growth style, given tech is by far the largest sector weighting.

Key highlights

As we discussed over recent months, this outperformance was largely sentiment based and not fundamentally driven. We have been watching for signs of improved earnings trends for technology relative to the broader market to become more constructive on the sector and the growth style. That has not occurred.

Accordingly, the weight of the evidence in our work suggests tech’s outperformance is unlikely to continue, and it remains premature to tilt towards the growth style.

Our view is informed by:

  • Technology earnings trends relative to the broader market are lagging.
  • Technology’s valuations relative to the S&P 500 recently hit the highest level since 2008.
  • Technology’s price trends relative to the S&P 500 are weakening after hitting the top end of its channel.
  • Weakening relative price trends are also apparent when reviewing the performance of the average technology stock as well as semiconductors, often a leading indicator for the sector.
  • Conversely, after pulling back, we are seeing improved comparative price trends for some of the cyclical sectors, most notably financials, which we remain overweight; this is the largest sector in the value style.
"Technology’s relative outperformance over recent months has not been supported by better earnings."

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