Tag Archive: technology

Tech Sector In The Driver’s Seat For US Relative Performance

In this post, we highlight the interaction of US outperformance versus the rest of the world this year and US Technology relative to Ex-US Technology.

  • First, the relative performance of the US equity market versus the rest of the world has been highly correlated with the relative performance of US Technology stocks relative to Ex-US Technology stocks.
  • Second, the outperformance of US Technology, and by extension the major US indices versus their non-US counterparts, looks likely to continue based on relative earnings estimate revisions patterns.

The chart below supports our first point. The US has outperformed the rest of the world this year by a healthy margin, based on the MSCI regional benchmark indices, as shown in the top section (plotted using rolling five-day averages). The lower section isolates the Technology sectors for the US and the Ex-US universe (also using MSCI indices) and plots the relative return of the US versus Ex-US Technology sectors.

US vs Ex US and Technology Relative Returns

We can see the close parallels in the charts for the year-to-date: as US Tech outperforms Ex-US Tech, so does the broader US market outperform the Ex-US aggregate. This in some ways seems unsurprising given the heavy weight that the Tech sector holds in the US compared to many non-US markets, but the relative weights are unrelated to the relative performance of the US versus Ex-US Tech sectors. We find that even after removing the effects of sector weightings, US stocks have outperformed Ex-US stocks this year, and this effect is particularly strong within the Technology sector.

Our second point is captured in the chart below. It shows our measure of aggregated earnings estimate revisions (the percentage of analysts raising versus lowering earnings estimates) for the US Tech sector and the entire Global Tech sector (which includes the US).

Technology Sector Revisions Breadth Metrics

We can see here that earlier this year, US and Global Technology estimate revisions (fundamental trends) were mostly moving closely together and slightly favored non-US Tech (US Tech revisions were slightly weaker than Global Tech revisions).  Both revision metrics improved sharply from the April lows through today. But the difference between the US and the Global Technology sector earnings estimate measures moved dramatically in favor of the US in July after Q2 earnings reports came out, and have generally remained there ever since. This suggests that US Technology stocks have a strong fundamental tailwind relative to Tech stocks outside the US right now. If that US Technology tailwind persists, the broader US market seems likely to resume outperforming the rest of the world in the coming months.

Growth leadership easing as rotation increases

One of the most notable market trends in recent weeks has been the corrective action in the formerly high-flying US large-cap Growth stocks. The dominant Tech-oriented companies that have been responsible for much of the gains in US large-cap indices for several months finally saw some significant selling pressure in the first two weeks of September.

The first chart below shows absolute and relative returns for the S&P 500 Pure Growth and Pure Value indices (i.e., the style indices restricted to stocks that fall entirely into their indicated style, leaving out those with weight in both indices).

SP500 Pure Growth Value Indices

Key points:

  • The Growth index has been above its 50-day moving average since mid-April (and made new highs recently), but has now returned to that average after its recent correction. Any further declines could raise worries about an intermediate trend change.
  • The Value index has failed to even approach its January highs and has made little net progress since early June. It is also sitting near its 50-day average.
  • Growth/Value relative returns show little net change in the last two months, following a period of drastic Growth outperformance. This is consistent with our recent sector allocation recommendations to clients that have reduced style-level sector bets in favor of intra-style differences.

Corroborating the Growth/Value trends is the relative performance of the Growth-heavy Technology sector’s returns. Below is a chart showing our broad (300+ constituents), equal-weighted US Technology sector performance relative to the broad (2000+ constituents) US aggregate.  


We can see that after a period of sustained outperformance through the middle of this year, the relative returns for Tech have been much more mixed, and have dipped lately. Investor optimism toward Technology has shown signs of reaching extremes recently, and thus some corrective action is not surprising.

We continue to expect Technology to be a leading sector on an intermediate-term time frame, but both the sector and the overall market may have to go through further choppy trading activity and rotation near-term.

Global Technology: still outperforming, but is it expensive?

Much of the attention in equity markets has been focused on the Technology sector, many of whose constituents are reporting Q2 earnings now. The Technology sector has outperformed dramatically both in the US and globally in recent years as well as for the year-to-date. This has raised questions about whether the sector is “overowned” and overvalued, particularly given its unusually high weighting in the S&P 500 index now.

While it may seem almost a foregone conclusion that after extraordinary outperformance the sector must be overvalued, our data suggest this is not necessarily the case.  We review a couple of interesting charts below, focusing on relative returns and valuations (not absolute valuations).

Global Technology Relative Return

  • Tech stocks have indeed outperformed globally, extending a long-term trend in place for seven years and counting now. The chart above shows the relative return of global Technology stocks in our stock universe relative to the return of the entire global universe (~6000 stocks currently). The returns are calculated on an equal-weighted basis (to avoid the potential distortions of a few mega-cap stocks), though the trends using cap-weighted returns look similar.

Global Technology Relative Valuation

  • Based on the relative forward earnings yields1 in Technology versus the global average, the typical Tech stock is not currently very far out of line with historical norms on a relative basis in our work. And Tech stocks are actually cheaper on a relative basis now than they were at the start of the year.
  • The chart above shows the relative forward earnings yield for the median2 stock in the global Tech sector relative to the median stock in the global universe. The solid horizontal line is the long-run average, and the dashed lines are +/- 1 standard deviation from the average.
  • The current reading of -1.4% reflects the Tech sector’s current median forward earnings yield of 3.5% (equal to a forward P/E of 28.5) being 1.4% lower than the global median forward earnings yield of 4.9% (equal to a forward P/E of 20.4).
  • Technology is a growth sector, so it almost always trades at a lower forward earnings yield (higher P/E) than the overall market. Historically, the earnings yield differential has averaged about -1.2%, so the current valuation spread (-1.4%) is actually quite close to the long-run average.
  • Even though Technology has outperformed this year, the sector’s relative valuation has actually improved since the start of the year (from -1.6% to -1.4%). This is because expected earnings for Technology have also outperformed the global average by a substantial margin this year.
  • Confirming the global figures, the chart below shows the same calculation for the US Technology sector, where it may come as a surprise to some to see that the median US Technology stock is actually slightly cheaper than average on a relative basis now, and significantly cheaper than at the start of this year.

US Technology Relative Valuation

Using valuation alone as a timing tool can be quite challenging, but our data suggest that Tech stocks are not especially overvalued on a relative basis (i.e., putting aside whether the entire equity market is fairly valued or not on an absolute basis). So long as earnings in Technology continue to outpace the average, valuation does not appear to be a major headwind to the sector’s relative performance at this point, either globally or in the US.

1 We use earnings yields (earnings/price ratios) instead of price/earnings ratios in aggregate calculations to properly account for the presence of companies with negative earnings. Consequently, higher numbers are more favorable. The forward earnings are based on rolling 12-month forward consensus estimates.

2 Using the median stock avoids potential distortions that can occur in cap-weighted calculations, where unusual movements in a few mega-cap components can skew the sector’s valuation figures at times.