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Time to Tweak Tech?

Year to date through December 19, the S&P 500 Information Technology sector gained 19.1% in price, as compared with the S&P 500’s advance of 12.0%. Unlike Consumer Discretionary and Health Care sectors – perennial outperformers since this bull market started in 2009 – the Tech sector has beaten the market only 50% of the time, and just once out of the last three years. So despite the misconception, Tech’s leadership has by no means overstayed its welcome. As we embark on a new year, S&P Capital IQ’s Investment Policy Committee continues to recommend overweighting the S&P 500 Information Technology group for several reasons, including:

  • Both the absolute and relative price trends for the sector remain above their 13- and 26-week moving averages.
  • Capital IQ consensus estimates call for an 11.1% increase in operating EPS in 2015, versus a gain of 7.2% for the S&P 500.
  • The P/E on 2015 EPS is 15.8X for Technology vs 16.5X for the S&P 500.
  • Tech’s trailing multiple is trading at a 20% discount to its median relative P/E since 1995 and at a 3% discount to its median over the past 10 years.
  • Finally Tech’s PEG (P/E on 2015E EPS divided by its projected five-year growth rate) is 1.2X as compared with 1.4X for the “500.”

S&P Capital IQ equity analysts currently rank 57 U.S.-listed stocks in the Information Technology sector with favorable investment rankings, and 17 companies ranked “Strong Buy,” or 5-STARS.

So, there you have it. We continue to recommend that investors overweight their exposure to the S&P 500 Information Technology sector, as 1) the price-performance trends remain our friend, 2) the sector, and a many of its sub-industries, are projected to record above-market EPS growth rates, and 3) we still believe the sector “pros” outweigh the “cons.” While investors may want to tweak their exposure within the sector, we don’t recommend reducing exposure to the group.

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