Technology stocks have been on an absolute tear this year, far outpacing the S&P 500 Index in terms of growth. But according to at least one Wall Street analyst, the impressive run to the north has exposed the sector to valuation risks, especially in the short term.
All said, it may be best to avoid technology stocks until after earnings season.
Neutral on Tech
Paul Meeks, an investor who ran the world’s largest technology fund at Merrill Lynch during the dot-com bubble, has raised red flags about the high-flying tech sector.
In an interview with CNBC last Friday, Meeks said, “I’m neutral to frankly a little bit bearish on the sector that I’ve covered for decades.”
His rationale: The sector is trading at overly lofty valuations given all the uncertainty around U.S.-China trade talks and the expected downturn in earnings. He’s especially concerned about the semiconductor industry, which is arguably the most vulnerable to tariffs. At current prices, it’s clear that investors have already priced in a resolution to the trade war, and have done so prematurely.
“This tariff question I think is very key for the semiconductor industry which again leads the tech sector in and out,” he said.
Trade Talks Set to Resume
Last month, President Trump and Chinese counterpart Xi Jinping agreed to suspend their tariff dispute and return to the negotiating table. On Tuesday, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin had a call with China’s Vice Premier and Commerce Minister “to continue negotiations aimed at resolving the outstanding trade dispute,” according to one U.S. official.
Negotiations have been on hold for nearly two months after China reportedly reneged on an agreement, prompting the Trump administration to issue a new round of tariffs. China responded by slapping duties on $110 billion worth of American products.
Mnuchin said last month that both sides were “90% of the way” towards a new agreement. However, Larry Kudlow, President Trump’s top economic adviser, says there is “no timeline” on a resolution.
Earnings Season
Meeks’ somewhat bearish outlook on technology stocks is reinforced by what many believe will be a weak earnings quarter for Wall Street. For the first time in three years, S&P 500 companies are expected to report back-to-back quarters of earnings declines.
For the quarter ended June 30, the estimated earnings decline for S&P 500 companies is -2.6%, according to FactSet, a financial research firm. Six of 11 S&P 500 sectors are expected to report a year-over-year decline in earnings, led by materials and information technology.
Reporting season kicks off in earnest later this week and will continue for the rest of July.
Conclusion
Despite the weak earnings outlook, industry analysts polled by FactSet believe the S&P 500 will shatter new highs over the next 12 months. Technology stocks are not expected to lead the record-setting rally, but are likely poised to continue higher. Of course, that outlook could deteriorate in a hurry if the United States and China fail to reach a new trade agreement.
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