Tech Sector Retains Leadership Despite Today’s Weakness

The technology sector is showing some weakness today with the Nasdaq index off -1.3% and the main sector ETF (XLK, $42.92) down -1.6%. The pull-back is led by First Solar (FSLR, $51.45, -6.6%), Acxiom (ACXM, $16.09, -5.4%) and Cirrus Logic ($36.05, -5.5%). These stocks are mid-cap names with market capitalizations in the $1-5bn range, not large cap core holdings in terms of market significance. Today’s weakness is not seen as indicative of an unfolding market correction. The tech sector continues to enjoy its market leadership position (year-to-date, XLK is ahead +4.0% while the S&P500 is up +2.2%), a role the sector has played since the March 2009 market bottom (XLK +302%, S&P500 +211%).

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Recent U.S. economic data has been mixed (CPI high, 1Q15 GDP slow), leaving investors with the impression of stagnating economic growth. This is concerning as one would expect the 50% drop in oil prices over the last year would have provided greater support for consumer spending, especially off improving employment trends. However, the main positive from a market perspective is that a moderating U.S. economy effectively serves to put off the potential start date for a cycle of tightening monetary policy as measured a rising Federal Reserve discount rate, something now thought to take place starting in September 2015. In this environment, we continue to expect investors will gravitate towards higher-growth tech names and thus support sector valuations.

While Traditional Product Cycles May Not Carry Same Weight, Spending Trends Are Positive

Historically, product cycles such as the introduction of a new Microsoft PC operating system would trigger sector growth with attendant stock appreciation in anticipation of the product demand upturn. This year will see the introduction of Windows 10, but the effect will be muted by historical comparison as competitor products such as Google Android and Apple iOS have become more significant in terms of the installed PC base, particularly mobile devices. Nevertheless, while such product cycle dynamics may be muted, there does remain a positive backdrop of rising capital spending. Recently, The Economist noted that corporate capex in 1Q15 outstripped the levels of corporate buyback activity, an indicator that enterprises are returning to the point of growing their business. Clearly, a positive indicator for tech sector product demand.