Thursday, November 18, 2021
The S&P 500 Information Technology Sector has gained 27% in the past six months, outperforming the broader S&P 500 by more than 10%. But could its run of leadership just be getting started? As shown in the LPL Chart of the Day, the sector just broke out to fresh relative highs for the first time since September 2020.
14 months without a new relative high may not sound like a lot, but that actually represented the longest streak of underperformance for the tech sector since a more than 3-year run that ended in 2015. And while the sector’s breakout does not mean that it will automatically go on another run of multiyear outperformance, we do believe context is important and that investors should recognize that just because technology has had a strong run recently, over the past 14 months the sector has performed just in line with the broader market. We would also note that these are not all-time relative highs for the sector, as it still sits below its early-2000 peak.
“The theme of 2021 has been rotation, rotation, rotation,” said LPL Financial Technical Strategist Scott Brown. “But technology is the only sector to recently hit a 52-week relative high and we believe that sets up a favorable outlook heading into 2022.”
From a fundamental perspective, technology continues to be a key enabler of higher productivity and home to many of the fastest growing companies. Despite topping all sectors with 9% earnings growth in 2020, earnings growth this year is on track to exceed 30%.
So does this mean investors should be shifting all of their assets over to growth stocks again? We don’t necessarily think so, and continue to find opportunities in both growth and value styles. In our proprietary sector trend rankings, technology comes in at #2, trailing only energy and just ahead of financials, both of which sit firmly in the value style and have benefitted from the continued reopening and above trend economic growth. We believe quality growth and more cyclical value companies can both do well in the current environment and remain most negative on defensive sectors such as consumer staples and utilities that have traditionally underperformed during early-to-middle stages of the business cycle.
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