There has been plenty of chatter regarding the technology sector’s June slump, but the Technology Select Sector SPDR (NYSEArca: XLK), the largest technology exchange traded fund by assets, along with rival, traditional technology ETFs are rebounding to start the third quarter.
XLK is higher by almost 45 over the past week, helping cement technology’s status as the best-performing S&P 500 sector this year. While earnings multiples on tech stocks have jumped this year, investors should not expect another tech bubble on par with what was seen in 2000. In fact, the largest tech stocks today are far less pricey than their counterparts were in 2000.
“The tech sector posted double-digit earnings growth in the last two quarters, and it boasts the highest percentage of firms exceeding earnings expectations in the past four quarters among the 11 Global Industry Classification Standard (GICS) sectors,” said State Street Global Advisors (SSgA) in a note out last week.
Technology companies are still sitting on cash hoards that can be deployed in ways to improve value with investors. We are already seeing an increase uptick in company share buybacks and tech firms are now even issuing dividends. Meanwhile, the industry continues to grow through innovation as more shift to cloud, progress into artificial intelligence and adopt internet of all things devices.
“Such strong earnings growth momentum is expected to continue through 2017, evidenced by the rising earnings estimates,” said SSgA. “The global economic environment is driving the sector’s growth prospects, as some of the headwinds the sector faced last year have turned into tailwinds. Since the tech sector has more foreign sales exposure than other sectors, it is more likely to benefit from the weaker US dollar and improving global growth we have seen this year.”
While valuations have been a concern for technology investors, particularly with big name stocks such as Apple Inc. (NASDAQ:AAPL) and Facebook Inc. (NASDAQ:FB), data suggest the technology sector is not as stretched on valuation as some investors believe it to be.
“Even though tech has outperformed the S&P 500 Index by more than 8% year to date, its valuations are not stretched relative to the broad market and nowhere near the levels reached at the peak of the dot-com bubble, notes SSgA. “Tech sector relative valuations to the broader market based on price-to-earnings and Enterprise Value (EV)-to-EBITDA are 15% and 7% below their historical median, respectively.”
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Tom Lydon’s clients own shares of Apple and Facebook.