TORONTO: JUNE 2, 2015 - Phones are pictured at the Microsoft store in the Eaton Centre in Toronto on Tuesday, June 2.Matthew Sherwood/The Globe and Mail
Oil's plunging, drillers are in free fall, retailers can't find a floor -- so how has the entire U.S. stock market managed to avoid caving in? The reason is technology stocks.
Computer and software makers have jumped about 14 per cent in the market's post-Sept. 29 surge, fuelled by investors chasing earnings growth. Gains in the Standard & Poor's 500 Index's biggest group have since then surpassed consumer-discretionary companies, an industry that is being driven almost entirely by technology cousins Amazon.com Inc. and Netflix Inc.
This exuberance has pushed Microsoft Corp. and Broadcom Corp. to levels last seen in 2001, while Visa Inc., Adobe Systems Inc. and Fiserv Inc. are among stocks that achieved record highs in the past month. The group closed at a 15-year high Friday. A wave of mergers and acquisitions has buoyed semiconductor makers, which have experienced the strongest rally among the broader industry's three main sectors.
"Investors are starting to embrace some of the big-picture secular trends that will drive growth in these companies for years to come," said Lew Piantedosi, vice president of growth equities at Eaton Vance Management in Boston, where he helps oversee almost $14-billion. "Even though the group's done pretty well, I think there's a long way to go."
More evidence came in Tuesday's market, a day in which the S&P 500 tumbled 0.7 per cent and the Nasdaq Composite Index slipped just 0.1 per cent. For the year, the S&P is about flat compared with the Nasdaq's 7.2-per-cent advance. Large-cap tech stocks fell 0.4 per cent as of 9:33 a.m. in New York Wednesday.
The strength of semiconductor stocks is particularly encouraging because the companies are seen as the most economically sensitive in the tech universe, countering some of the renewed concerns about global growth, according to Mr. Piantedosi.
Along with "pretty powerful cyclical trends" -- namely, growth in industrial, automotive and housing end-markets -- these companies have benefited from industry consolidation, he said. Deals announced this year include Intel Corp.'s planned purchase of Altera Corp. and Avago Technologies Ltd.'s acquisition of Broadcom.
Consolidation provides an additional catalyst, but Atul Lele, chief investment officer at Deltec International Group, has had a bullish outlook on the group since 2013 because of attractive fundamentals. "We see the single biggest opportunity for global growth as being a rise in U.S. productivity growth," with technology-makers directly benefiting from capital investment, said Mr. Lele, whose firm has about $2-billion in assets.
A "growth-starved market" has favoured tech stocks since this summer's rout, said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, a unit of KeyCorp that oversees more than $25-billion in assets. "Especially in an environment where economic growth has been weak and earnings growth has been weak, these are the sorts of stocks that often come through for you."
Revenue in the large-cap tech sector is expected to rise 4.7 per cent during the current year, the third-most of the 10 S&P 500 industries, while earnings will expand 12 per cent. By comparison, revenue and earnings for the benchmark gauge are expected to contract.
While investors have a renewed focus on tech, megacaps still are doing the heavy lifting. Since late September, Microsoft, Apple Inc., Facebook Inc. and Alphabet Inc., Google's parent, have accounted for about 60 per cent of the rally in S&P 500 technology shares.
"Large-cap tech stocks are winning because they've been able to deliver top-line and bottom-line growth in an environment where most other companies can't," said Don Townswick, director of equities at Hartford, Conn.-based Conning Inc., which manages $92-billion. "Since the bottom, market participants are focusing back on what they were focusing on before" and that's helped spur a broader tech rally, he said.
With stocks flirting with levels last seen in the dot-com bubble, is there cause for concern? No, Mr. Townswick says. The group isn't "overly frothy," largely because companies are generating "real" revenue and earnings, and the industry is different now than 15 years ago, he said.
Even so, if the broader market were to weaken, tech stocks could lose favor because their moves normally exceed those in the overall index, McCain said. Meanwhile, breadth in the benchmark gauge is of concern to some investors and this industry still has pockets of weakness, he said.
Still, tech may assume the "leadership mantle" in 2016, as the year ahead could bring broader participation, Mr. Piantedosi said -- and Mr. Lele agrees.
"I can't think of another sector that has as significant an expansion in breadth ahead of it," Mr. Lele said.