By Harvest ETFs
The tech sector has not had an easy 2022 so far. The S&P 500 Information Technology index posted an almost 30% loss since January to the most recent market lows hit in mid-June. Since those lows, however, the tech sector has rallied somewhat with that index regaining about half of what it had lost. The portfolio manager behind the Harvest Tech Achievers Growth & Income ETF (HTA:TSX) explained that the recent July earnings season has been key to this relief for tech investors.
“Over the course of earnings season, reactions to forward guidance and earnings reports ended up relatively favourable,” said James Learmonth, Senior Portfolio Manager at Harvest ETFs. “Investors had been quite pessimistic going into this season, but some key companies beat expectations and their stocks did quite well.
“Some other companies came in below expectations and took a hit, but many of them saw a rebound over subsequent days. We saw that investor sentiment towards a combination of company fundamentals and the sector as a whole became more positive, especially after we saw signs of inflation peaking and the potential for less hawkish central banks.”
Why the tech sector rallied
Learmonth explained that the biggest lessons from earnings season were about revenue sources for technology. Broadly speaking, consumer spending is weak while enterprise spending has remained strong. Consumer weakness can be attributed, in part, to individuals’ heightened tech spending on devices like PCs, phones and TVs during the pandemic, which means those individuals don’t need to buy a new laptop or phone this year. It is also due to inflation and a less confident consumer.
On the enterprise side, however, some of the fears of businesses paring back their tech spends after ‘pulling forward’ their tech dollars in 2020/21 have been allayed. That is due, Learmonth said, to the significant runway companies still have ahead of them as they work to complete their digital transformation with investments in key cloud infrastructure, cyber security, and keeping pace with innovation. The latter two categories are likely evergreen sources of demand for the tech sector.
Expectations of a weaker consumer had already been priced in by investors, Learmonth explained, as forward expectations were revised down earlier in the quarter. Come July, the sector was set up for greater success with some companies beating expectations.
Nevertheless, we also saw rallies in companies that missed their expectations. Learmonth cites the example of AMD, which gave modest guidance and took an immediate stock hit when its earnings were announced. However, as the news filtered in that the broader tech sector was rallying, and as investors took note of AMD’s increasingly competitive product set, the stock rallied to above its pre-reporting highs.
These are signs, Learmonth said, of underlying positivity for the sector in the longer-term, especially as leading companies in the sector show themselves to be mature, rational, and profitable through economic cycles.
A large-cap focus on technology stocks
Learmonth explained that while there was mixed performance across some subsectors, many leading companies showed their maturity and established place in the market. Early in earnings season, for example, Snapchat posted very poor earnings below guidance, which some analysts took as a bellwether for the whole digital advertising subsector, including companies like Meta and Alphabet. While those companies did take hits in Q2, they were far less damaging than what many expected after Snapchat’s news. Established companies with wider market shares and more diverse revenue streams, Learmonth said, showed their ability to weather downturns once again.
It’s that maturity that Learmonth said was highlighted in earnings season. Companies took rational steps with the bottom line in mind, whether in cutting staff, pausing hiring, or revising guidance, and markets generally greeted that news warmly. Many of those mature companies have already outlasted one market cycle and shown track records of profitability for years.
Those mature companies are the focus of HTA, a tech ETF which combines 20 large-cap technology leaders with an active covered call strategy to earn monthly cashflow. Those companies’ performance is generally more related to market dominance and profitability than the promise of a particular new ‘innovation’ that some higher-beta stocks trade on. By focusing on mature companies, and generating consistent cashflow, Learmonth believes that HTA can deliver exposure to the tech sector that suits many investors’ needs and risk tolerances at this moment in the market.
“The tech sector has come through some challenges and still has a lot of uncertainty ahead of it,” Learmonth said. “But we believe that tech has significant long-term growth prospects and a large-cap, diversified portfolio combined with a covered call strategy for monthly cashflow shows a lot of promise for investors who want to access the sector.”
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By James Learmonth, CFASenior Portfolio Manager |
