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By Jason Lincoln, CFA

Equity Analyst

 

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Even as other major U.S. stock indexes struggle for traction in 2018, the Nasdaq Composite’s total return is up by double digits year to date. This week, the technology-led index reached a new all-time high on Monday – its first since early March – and then it beat that mark on Tuesday.

 

Within the S&P 500, the tech sector is outperforming the overall index by more than 11 percentage points. This strength is defying early-year predictions that tech’s prolonged time on top of the stock market might be threatened as investors rotated their money toward lower-priced sectors like financials, industrials and energy, which stood to benefit from the federal corporate tax cuts, rising interest rates and higher oil prices.

 

Among the key drivers for tech this year are a couple of stocks from the so-called FAANG group: The share price for Netflix has almost doubled so far in 2018, and Amazon is up more than 45 percent. The rest of that headline-grabbing quintet – Apple, Facebook and Google (parent company Alphabet) – are matching or lagging the sector overall.

 

Offsetting the lower trio of FAANG stocks are some familiar names from the late-1990s tech bubble. Shares of software maker Adobe Systems have climbed more than 40 percent this year, while old stalwarts Microsoft and Intel are both up more than 20 percent. Newer arrivals like Salesforce, another software maker, are also faring well.

 

For 1Q, technology was among the S&P 500 sector standouts in terms of both earnings growth and revenue growth. In its June 1 weekly report, data provider FactSet estimates that tech will again be among the sector leaders for 2Q as well.

 

In our view, software represents a potent multiyear investment theme. The root of this opportunity is its strong secular drivers, led by the accelerating transition to cloud computing and the digital transformation under way within businesses.

 

Most of Amazon’s attention comes from its disruptive retail operations, but we think its substantial presence in cloud services stand to be a bigger contributor to profitability over the longer term. Microsoft and Google are also growing their cloud-related offerings. Salesforce and Adobe are benefiting from the digital transformation trend.

 

Privacy issues have been providing most of the headwinds faced by Facebook and Google. We see those issues as being largely transitory. In our view, the companies will figure out how to address the concerns about the collection and sharing of customer data. There will be costs associated with this effort, but those costs stand to be more than offset by the rapid growth in the digital advertising market that those companies dominate.

 

And in what could be a slightly ironic twist, the privacy issues now hurting the Facebook and Google brands could turn into an advantage in the long run if the costs or other obstacles related to privacy protection discourage other competitors from entering the market.

 

The most commonly heard knock on the tech sector relates to its lofty valuations after years of strong gains in share prices. We try to not rule out any opportunities based solely on current valuations. While some valuations within software may be on the high side, we think the secular drivers discussed earlier should be considered in terms of balancing current fundamentals and future potential. Within the sector, we are finding pockets of value, including in hardware and semiconductors.  

 


As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are suited for you based upon your individual goals, objectives, risk tolerance and time horizon.

 

 

Investing in securities products involves risk, including possible loss of principal.

 

This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisors. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.

 

Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.

 

Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability.Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies.There may be less publicly available information relating to foreign companies than those in the U.S. Foreign securities may also be subject to foreign taxes.Investments made in emerging market countries may be particularly volatile.Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems.

 

Standard & Poor’s 500 Index and S&P are registered trademarks.The S&P 500 Index is an unmanaged index of 500 stocks.TheS&P 500 focuses on the large cap segment of the market, covering 75% of the U.S. equities market.S&P 500 is a trademark of the McGraw-Hill Companies, Inc.

 

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

 

USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI. Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.

 

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