- Tech stocks have been an invaluable part of broader stock market strength in 2017, returning more than double the benchmark S&P 500.
- Sceptics said for months that the air would have to come out of tech stocks, which they said had gotten overextended.
- Tech companies have responded by reporting some of the best earnings growth out of any sector in the S&P 500.
The tide was supposed to turn for scorching-hot tech stocks.
To hear sceptics tell it, the group, which was so crucial as major equity indexes ripped higher to new records for much of 2017, was getting overextended. And that was supposed to result in a sharp move lower not just in tech, but for the whole market.
As recently as October, hedge funds and other large speculators were the most bearish in 16 months on tech. Back in August, investors sold more than $US1 billion of tech stocks in one week, the biggest offloading since January 2016. Uncertainty was high even back in mid-July, when the traders were paying the biggest premium since 2008 for hedges against tech losses.
But tech has kept doing what it does best: expanding corporate earnings at a blistering pace. And that’s alleviated concerns of a slowdown. After all, earnings growth has been proven time and time again to be the fuel that keeps the 8 1/2-year bull market running.
Tech companies in the S&P 500 expanded profits by 22% in the third quarter, the second-most in the index, trailing only energy, according to Goldman Sachs data. The firm found that the stellar performance was driven by above-forecast 17% sales growth and margin expansion.
And as was the case earlier in the year, tech wielded outsized influence over the rest of the stock market. Earnings surprises in the sector contributed to almost 90% of the benchmark’s overall profit beat, relative to consensus estimates, Goldman data show.
As of Monday’s close, tech stocks in the S&P 500 had surged 37% in 2017, more than double the benchmark. That includes an 8.8% gain since the start of October.
Going forward, internationally exposed mega-cap tech companies are expected to benefit from President Donald Trump’s proposed corporate tax cut, since they pay among the highest effective rates. Further, because so many large tech firms do so much business overseas, they’re also among those best positioned to benefit from the repatriation tax holiday proposed by the GOP.
Here’s a look at how market-wide earnings growth — driven by tech — will fare in the coming quarters:
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