Owning US Tech Shares Is No Longer a Quick Route To Big Returns

Cycles. Remember them? Tech is not immune, especially now that most of the world has bought in - literally and figuratively. JL

Nicole Bullock reports in the Financial Times:

The S&P 500 technology sector has fallen 3.8 per cent since the start of the year and is in danger of losing further momentum. For the broad market, the woes facing the tech sector matter, given its status as the largest sector of the S&P 500, representing a fifth of the benchmark.
Owning US tech shares has long been a quick route to big returns for investors. Not this year.The S&P 500 technology sector has fallen about 4 per cent this week alone. As energy and telecom services lead the way with double digit gains for 2016, tech loiters in the basement, down 3.8 per cent since the start of the year and in danger of losing further momentum.For the broad market, the woes facing the tech sector matter, given its status as the largest sector of the S&P 500, representing a fifth of the benchmark. Heading into the current earnings season, the market was sitting near last May’s record peak, looking for the sector to help shift momentum into a higher gear.
“We are going to want tech to participate in any rally,” says Alan Gayle, director of asset allocation at RidgeWorth Investments. “In order to say the market is back in a bullish phase we need to see tech participate.”

While the likes of Facebook and Amazon have delivered, too many other big tech names have disappointed investors with their latest quarterly results. Earnings for the tech sector overall are expected to contract 7.7 per cent in the first quarter compared with the same period a year ago, according to FactSet.

Accounting for 5 percentage points of that drop is Apple, which has the largest single weighting in the S&P 500 and disappointed investors with its first quarterly drop in revenue in more than a decade. The first quarter marks the first time Apple has been the worst drag on the technology sector’s profits since 2013, according to Factset.

Shares of Apple have fallen around 12 per cent since Monday at a time when fellow tech companies Twitter, Microsoft and Google’s parent Alphabet have also missed Wall Street’s expectations for their earnings in the latest quarter.

In turn, tech has lost momentum. Last year, for example, owning the so-called FANGs — Facebook, Amazon, Netflix and Google — turned out to be a swing factor in performance for portfolios.

After being among the top five performing sectors in the index in the last four years, investors’ attention of late has been drawn to other areas that are outperforming. Energy is among the top performers in the S&P 500 year to date, up 11 per cent.
“It feels like there is a lot of money rotating out of tech, primarily into energy and some financials,” says Nicholas Colas, chief market strategist at Convergex. “There is always a slice of the market that moves into whatever is working today and there is no doubt that energy is working today.”
Another factor is the size of some tech companies. That makes outsized growth harder to come by.

“I wouldn’t say the tech rally is over,” says Skip Aylesworth, a portfolio manager at Hennessy Funds. “What you have are some companies that have gotten so big that the year-over-year numbers don’t compare well. They have also become more mature — there is not the innovation to drive the growth.”

He puts Apple, Microsoft, IBM and, to a certain extent, Google, in that category.

Standard & Poor’s cut its outlook on IBM to negative, a move that often precedes a downgrade, with the US tech group having struggled with 16 consecutive quarters of sales declines.

Still, there are outliers. Facebook, for example, bucked the negative trend. It beat earnings and revenue expectations, after recording a 52 per cent surge in first-quarter sales. Facebook shares jumped 7 per cent after the news and are up more than 11 per cent this year.

Amazon, too, surprised to the upside, reporting its most profitable quarter to date. The stock rallied sharply on the news.

Still, Mr Aylesworth sees innovation resting on the smaller companies, with cyber security, for example, as an area where companies can hit on new products and produce rapidly growing sales.
Investors face an uncertain macro environment, too. Concerns about China, geopolitical issues and negative interest rates all point to a less-than-stellar global economy and in turn less expendable income for consumers to buy the latest gadgets.
“For growth investors who need exposure to tech, there is a search under way to find the names that can still grow through the rest of the year,” Mr Colas says. “We’re playing scrabble to see what new word will replace FANG.”