Technology stocks nearing record territory on broad-based recovery

May 15, 2018

Published by Harvest Exchange Traded Funds

Information technology stocks are currently nearing record levels after rebounding sharply so far in May.

The broad-based rally in the sector follows a decline in stock prices earlier this year on fears that valuation levels were elevated, with the potential for further upside limited. As well, expectations of weak iPhone sales by Apple Inc. in the first-quarter and the Facebook Inc. user data scandal added to the woes of tech stocks.

However, confidence returned to the sector on the back of a broad-based recovery that saw Apple and Facebook leading the rally, with companies such as Google’s parent Alphabet Inc. and semiconductor stocks like Nvidia Corp. and Advanced Micro Devices also making solid gains.

According to a MarketWatch article *, tech stocks were up on all major US indices, including the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite thus far in May.

Apple climbed higher on strong quarterly earnings reports, a steep increase in sales in China and reports that billionaire investor, Warren Buffett bought 75 million shares of the stock in the first quarter, providing a vote of confidence in Apple.

Facebook, on the other hand, rose sharply in the wake of stellar earnings, enabling to stock to recover most of its post-scandal losses – indicating that concerns over privacy issues have not had the negative impact earlier anticipated.

In reality, earlier fears of overextended valuations in the tech sector are not warranted. According to Bloomberg data as of May 8, 2018, tech valuations are nowhere near bubble territory. The sector was trading at a discount to the S&P 500 until the recent April correction when bigger declines in the S&P 500 pushed valuations back below those of the sector. When adjusted for expected growth prospects, tech continues to look attractively valued relative to the market.

In addition, based on Trailing 12-month Earnings per Share (EPS) normalized to April 30, 1998 – not only has the EPS growth of tech outpaced the S&P 500, its EPS growth has been accelerating relative to the broader market.

The MarketWatch article notes that overall the tech sector has posted revenue growth of 13.58% over the past year, according to FactSet data, well above the 9.69% growth of the S&P 500.

The Harvest Tech Achievers Growth and Income ETF (HTA:TSX) invests in an equally-weighted portfolio of equity securities of 20 Technology issuers listed on North American stock exchanges, such as Facebook, Inc., Apple Inc., Nvidia Corp., and Alphabet Inc. which have all made solid gains in May.

For further information about Harvest Tech Achievers Growth and Income ETF (HTA: TSX), please click here.

*MarketWatch Article: May 10, 2018 “Tech Stocks have regained their mojo in May – Tech Sector is back near records”

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