IN­VESTORS BET ON LONGER TECH RALLY

Cor­po­rate tax cuts and re­duced reg­u­la­tions planned by Trump will give com­pa­nies rea­son to spend more

New Straits Times - - Business -

TECH­NOL­OGY com­pa­nies have been a driv­ing force be­hind the United States stock mar­ket’s re­cent record rally, and de­spite mount­ing ev­i­dence of stretched val­u­a­tions, the sec­tor re­mains a top pick for in­vestors ex­pect­ing a wave of cap­i­tal ex­pen­di­tures by US cor­po­ra­tions.

Cor­po­rate tax cuts and re­duced reg­u­la­tions planned by Pres­i­dent Don­ald Trump will give com­pa­nies rea­son to spend more on cloud com­put­ing, fac­tory au­to­ma­tion and smart con­nec­tiv­ity that will di­rectly ben­e­fit Sil­i­con Val­ley, many on Wall Street be­lieve.

“The tax cuts are go­ing to pro­mote busi­ness in­vest­ment across all in­dus­tries, and the busi­ness in­vest­ment is largely go­ing to be in tech­nol­ogy,” said Doug Cote, chief mar­ket strate­gist at Voya In­vest­ment Man­age­ment, here.

Strong per­for­mances from big names in­clud­ing Ap­ple Inc and Face­book Inc have helped make tech­nol­ogy the strong­est S&P 500 sec­tor so far this year, surg­ing 10 per cent com­pared with the broader in­dex’s six per cent rise.

In the past month, in­vestors have poured US$325 mil­lion (RM1.45 bil­lion) into to the USlisted Tech­nol­ogy Se­lect Sec­tor SPDR Fund, ac­cord­ing to ETF.com, which tracks fund flows.

“We may be due for a lit­tle bit of a pull­back, but we are still buy­ers on weak­ness be­cause we like the longer-term out­look over the next two to three years,” said Terry Sand­ven, chief eq­uity strate­gist at US Bank Wealth Man­age­ment.

The pro­lif­er­a­tion of smart, con­nected de­vices in homes, fac­to­ries and stores is lead­ing to the col­lec­tion of un­prece­dented amounts of data and cre­at­ing de­mand for more com­put­ing power to an­a­lyse it.

Spend­ing on cloud com­put­ing will grow by 21.5 per cent a year through 2020, al­most seven times as fast as over­all in­for­ma­tion tech­nol­ogy spend­ing, ac­cord­ing to a re­cent es­ti­mate by mar­ket re­search firm IDC.

Im­proved em­ploy­ment and con­sumer con­fi­dence have also been be­hind in­vestors’ op­ti­mism about tech, help­ing off­set con­cerns about lofty val­u­a­tions.

Af­ter an eight-year US stock mar­ket rally, nearly all sec­tors are trad­ing at earn­ings mul­ti­ples above their long-term av­er­age, but none more so than tech­nol­ogy, ac­cord­ing to Thom­son Reuters Datas­tream.

The tech sec­tor’s strong per­for­mance has left it trad­ing at 17.9 times ex­pected earn­ings, com­pared to its 10-year av­er­age of 14.5 times ex­pected earn­ings.

The S&P tech sec­tor’s price-toearn­ings mul­ti­ple has been above its own long-term av­er­age for about a year, and dur­ing that time the sec­tor has surged about 28 per cent.

Tech bulls be­lieve earn­ings mo­men­tum is grow­ing for the sec­tor. S&P 500 tech earn­ings ex­panded 12.3 per cent in the fourth quar­ter, more than any other sec­tor, ac­cord­ing to Thom­son Reuters data. An­a­lysts on av­er­age ex­pect 13.6 per cent growth for the March quar­ter.

Re­cent up­beat quar­terly reports and com­men­tary from Broad­com Ltd, Sky­works So­lu­tions Inc and Ap­plied Ma­te­ri­als Inc sug­gested semi­con­duc­tors were poised for strong growth, said Wed­bush trader Joel Kulina.

Mi­cron Tech­nol­ogy Inc jumped 3.5 per cent on Fri­day af­ter rais­ing its 2017 fore­cast the day be­fore, helped by healthy de­mand for its mem­ory chips.

“I can’t re­mem­ber a time when we’ve seen this much ex­cite­ment,” said Kulina.

“Semi­con­duc­tors aren’t as cycli­cal as they used to be, where quar­ters were driven by per­sonal com­puter de­mand. Now it’s au­to­mo­tive, it’s data cen­tre, in­dus­trial au­to­ma­tion.”

REUTERS PIC

Strong per­for­mances from big names in­clud­ing Ap­ple Inc and Face­book Inc have helped make tech­nol­ogy the strong­est S&P 500 sec­tor so far this year.

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