Higher interest rates historically bode well for tech stocks, as they tend to lead the broader market during periods of rising short-term yields, Jacobsen said. That’s in part because these companies are less financially leveraged than peers in other industries, so they’re “not as vulnerable” to higher costs for servicing debt, Lee said.
Valuations also are compelling, Jacobsen and Lee agreed. The stocks are trading at about 13 times earnings on a forward- looking basis -- a similar level to the S&P 500 -- compared with a historical average of 17, Jacobsen said. That’s unusual because tech usually trades at a premium to the broader market, he said.
In addition, consensus analysts’ estimates suggest “subdued” earnings growth in the next five years -- about 12.5 percent versus 14.5 percent historically -- so if these companies can exceed expectations it will push their stocks higher, Jacobsen said.
‘Really Gun-Shy’
Not everyone agrees the industry is poised for an increase in business demand.
“There’s plenty to be worried about in tech because it’s a tale of two economies when it comes to spending,” Maronak said. While consumers have been “unbelievably resilient,” companies still are “really gun-shy,” he said. “The economy is nowhere near where it needs to be for companies to go spending the amount of money they used to on computers and other equipment.”
Some investors remain reluctant because they worry about the industry’s global exposure, Lee said. He’s less concerned about that, though significant weakness in emerging markets would pose “the biggest risk” to stock performance, he said.
That’s not the case for Cisco, as its sales in emerging markets could expand by as much as three times total growth, Chief Executive Officer John Chambers said in a June 20 interview with Bloomberg Television. In the three months ended April 27, Cisco saw “continued improvements from a total geographic perspective,” and for the first time in six quarters, reported growth across its four customer segments, he said on a May 15 conference call.
Shares of the San Jose, California-based company have outpaced the S&P 500 Index by about 17 percentage points since May 15, when it reported fiscal third-quarter results.
“Any sense that businesses are spending more freely in capital-spending cycles helps,” Katz said. “The bull case for these stocks is enforced by a self-sustaining U.S. economy.”