The tech sector has been preferred by investors since the presidential elections in 2016. However, the strong rally in US tech stocks came to an abrupt halt as it appeared more likely that the Goldilocks environment of moderate growth and low inflation is coming to an end. The tech sector has been a major beneficiary of this environment.
The NYSE FANG+ Index, which measures the performance of the so-called FAANG stocks: Facebook Inc, Apple Inc, Amazon.com Inc, Netflix Inc and Google’s parent company Alphabet Inc, as well as other technology-related stocks, dropped by almost 10 per cent in three days at the end of July. The S&P 500 Information Technology Sector total return index dropped by five per cent during the same period.
After a solid run in the NYSE FANG+ index, which witnessed the resilience in share price performance during the market rout in the first quarter of this year, Facebook Inc was the first to trigger the sell-off when it reported half-yearly results on July 25 missing projections on revenues and global daily active users. This, combined with a challenging quarter for the company in dealing with the data leak scandal, resulted in a drop of 19 per cent in its share price on the day wiping off around $123 billion of its market capitalisation.
While the other FAANG companies experienced a similar reaction, the results reported by Apple Inc on July 31 have led to a small correction in the NYSE FANG+ Index as they posted stronger earnings per share and revenue growth when compared to consensus estimates.
However, investors have been exiting this space as exchange-traded funds (ETFs) which invest in these tech companies suffered significant outflows during the retreat in July. The selling pressure on such exchange-traded products has potentially contributed to the wider sell-off across other equities in this space. This was probably the result of the crowding out effect of seeking to exit few of such growth stocks representing the largest portion of the market.
The weak results coming out of the tech sector should not take away the shine from the strong earnings season that is under way in the rest of the US stock market. According to Bloomberg, S&P 500 companies are expected to report growth in second quarter corporate earnings of 25 per cent on average. When excluding megacap tech equities, the reported growth in corporate earnings is expected to be 37 per cent.
The strong corporate earnings season in the US seems to be dampening the possibility of an adverse impact of global trade tensions on corporate profitability. This is leading analysts to revise earnings growth expectations for 2019 higher.
Economically, the US seems to be on the right path. GDP growth for the second quarter reached a stellar 4.1 per cent while unemployment remains at very low levels. The improved earnings expectations, combined with positive economic developments, suggest that the relatively high US equity valuations may be well justified and could increase further despite the tightening monetary policy and the path of interest rate hikes indicated by the Federal Reserve.
Matthias Busuttil is senior portfolio and investment manager at Curmi and Partners Ltd.
www.curmiandpartners.com
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.