Technology stocks’ stellar performance. Global technology sector kick-started the year with a strong +15% YTD performance, significantly outperforming global equities (+8% YTD). This is an encouraging showing by all accounts after a turbulent 2022, which saw the sector correct some 30% due to a ‘perfect storm’ of headwinds: 425 bps of Fed rate hikes, high inflation, elevated energy prices, the Russia-Ukraine war, supply chain disruptions, and an impending global slowdown.
Investors are looking past current headwinds. . In spite of the headwinds and perception of earnings weakness, technology firms have, against the odds, delivered promising results. Based on the list of S&P technology firms that have reported earnings, c.80% delivered better-than-expected results and only 18% were below. An improvement from 75% and 18% reported in the prior season, respectively.
Judging from the recent share price performances, it would appear that the challenges of 2022 have entered the rearview mirror as investors are gradually looking past them and forward to a better 2023 where technology firms’ operating and financial metrics are expected to recover.
Optimistic long-term outlook. While tech leaders have reported a mixed bag of earnings in their recent result announcements, their management teams have generally guided for an optimistic outlook (Table 1) driven by the bottoming in end-demand, resilient pricing power, staff size rationalisation, China reopening, and recovery in profitability.
Figure 1: Tech stocks trading at historically attractive valuations
Source: Bloomberg, DBS
Table 1: Weak earnings did not deter share price rebound
Source: Bloomberg, DBS
As at 3 Feb 2023
Additional catalyst from valuation support. Global technology is presently trading at forward price-to-earnings ratio of 22x (Figure 1), on par with -1 standard deviation to mean. Similarly, the sector’s price-to-book ratio of 5x is at the lower half of historical range. With a projected 20% forward earnings growth expected in 2024, there is attractive value and further upside for multiple expansion once investors start to appreciate the sector’s fundamentals.
Remain constructive on global technology and stay engaged. . The technology sector fits in well with the growth side of the CIO Barbell Strategy and forms the core construct in the I.D.E.A. Strategy. To reiterate, both the CIO Barbell and I.D.E.A. Strategies have done well on a YTD basis and outperformed their respective benchmark indices (refer to recent CIO Perspectives dated 1 February).
With the backing of solid fundamentals and in anticipation of sustained earnings recovery, we reinforce our constructive stance on the technology sector along with investment themes surrounding Big Tech and digital transformation: cloud, IC design, data analytics, EV, online content, high-performance computing, cyber security, and semiconductor equipment.
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