Technology shares surrendered their leadership in the U.S. stock market over the past month, but the fast-growing group may soon resume its outperformance and maneuver back into pole position.
Upcoming earnings reports for the technology sector, whose profits are expected to outpace the overall S&P 500 for the 11th consecutive quarter, could lure back investors who have been concerned about expensive valuations and that too many people may have piled into the big names.
The sector has slumped 4 percent since the first week of June, while financials have climbed more than 5 percent and healthcare has gained 3 percent. This has prompted speculation that investors may have been cashing out their tech profits to move into those groups.
"Technology has taken a rest, but it’s going to heat up again, and I see tech returning to favor the second half of the year," said portfolio manager J. Bryant Evans of Cozad Asset Management in Champaign, Illinois.
For the first five months of 2017, tech was the talk of the stock market, far outperforming the other 10 major S&P 500 sectors and sparking the Nasdaq Composite to its strongest first half since 2009.
"I think of (tech's recent swoon) as profit-taking rather than driven by change in the fundamental factors," said John Praveen, managing director of Prudential International Investments Advisers in Newark, New Jersey. "The fundamentals are still positive for the sector."
Analysts estimate tech's second-quarter earnings rose 11.2 percent, with semiconductor companies accounting for much of the gain, according to Thomson Reuters I/B/E/S. The increase tops the estimated 7.9 percent rise for the overall S&P 500 and is well above every sector except for energy, whose performance will be skewed because of negative year-earlier results.
"The tech sector has the highest growth expectations and only moderate uncertainty," Morgan Stanley equity strategists said in a research note.
Given tech's outsized position - 22 percent of the market value of the S&P 500 - the sector's growth is critical to overall U.S. corporate profit gains.
For the second quarter, tech profit growth alone is expected to account for nearly 28 percent of the S&P 500's overall increase in earnings, or nearly half if energy were excluded.