Why it’s time to be overweight tech

If there is one sector you want to be in these days, it’s technology.

U.S. tech stocks have been among the best market performers this year, and they are expected to continue that way because of healthy longterm trends in both earnings and cash flow, along with very strong corporate balance sheets.

“Although the sector is not growing earnings as strongly as it did earlier in the cycle, trends have been improving lately,” said Brian Belski, chief investment strategist at BMO Capital Markets.

He noted that tech is one of the few sectors that has maintained earnings growth above 10 per cent during the past year. It’s also become one of the most consistent in terms of low earnings volatility, a major reversal from what was the case only a decade ago.

Belski also believes the sector’s natural maturation process and its strong operating fundamentals will make it a leader in the coming quarters, particularly given its still-reasonable valuation.

He noted that tech-sector multiples have moved only slightly higher in recent months, leaving valuations pretty attractive from a historical perspective.

“In fact, forward price multiples currently trade at a significant discount both to their longer-term historical average and relative to overall S&P 500 multiples,” Belski said in a research note.

The strategist also pointed out that the tech sector has generated the strongest dividend growth of all sectors in the U.S. during the past five years.

And since it’s home to high cash balances and low dividend payout ratios, the potential for dividend hikes is high.