- Tech stocks have slid after the US Senate passed its version of tax reform.
- One analyst at Credit Suisse thinks lower prices means that now is the time to buy.
- Strong business fundamentals that have propelled tech will likely continue, leading to strong stock performances for many tech companies.
As tax reform made its way through the US Senate, investors started the bill’s impacts if it passed. On Saturday, the Tax Cuts and Jobs Act did pass, bringing many of the details of the bill to light. That set off a wave of trading for investors hoping to better align their portfolios to take advantage of the Senate’s bill, which still needs to be reconciled with the House’s and signed by the President before becoming law.
Monday and Tuesday saw a general rise in financial stocks and a decline in tech companies.According to analysts at Credit Suisse, though, the rotation will be short-lived.
“TECH+ is our favourite sector given its strong fundamentals,” Jonathon Golub, an analyst at Credit Suisse said. “We believe an investor’s time horizon should determine their focus on tax policy.”
For those investing for the long term, Golub said the tax bill is secondary to business fundamentals. Basically, investors will be focused on playing tax reform in the short term, but it won’t change the big picture.
Because the companies that are most affected by tax reform are ones that have a majority of revenue in the US, Transportation, Retail, and Financial companies have gotten a boost immediately following the passing of the Senate bill, according to Golub.
But, tech has largely outperformed the general market in 2017, and Golub said that it will likely continue to do so after the rotation. Golub points out that the tech sector is in the top four sectors for revenue growth, earnings growth, and return on equity.
On Tuesday, Golub pointed out that the tech sector is only slightly more expensive than the rest of the market on a price-to-earnings ratio basis. Tech has a P/E ratio of 19.8, while the S&P 500 currently has an 18.2 P/E ratio. At the end of 1999, before the tech bubble burst, the ratio for the tech sector was nearly double that of the general market.
“The fundamental backdrop is much stronger for this group than other sectors. Further … any pressure on valuations represents a buying opportunity for longer-term investors,” Golub said.
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