It’s been a remarkable run for the information technology sector. For example, a $100,000 investment in the Technology Select Sector SPDR Fund (XLK) a decade ago would be worth a tidy $563,000 today.
And while tech stocks have pumped up an untold number of portfolios, the winds now appear to be shifting. The XLK fund has slid 10 percent in the past three months as a broad set of tailwinds have morphed into headwinds.
In recent weeks, tech stalwarts such as Nvidia, Applied Materials, Apple, Netflix, Google and others have been subject to downward profit forecast revisions for 2019. Blame goes to trade tiffs with China, slowing demand in tech-intensive industries like autos, and a plateau in consumer electronics spending.
The year ahead won’t be a challenge for just the tech sector. “Credit-like” equities, such as utilities and REITs, may be hard pressed to compete for investor attention if fixed-income rates keep climbing in the face of further Federal Reserve rate increases.
And the current trade tensions with China have handed a sucker punch to industrial stocks. Since the quarter began, the Vanguard Industrials ETF (VIS) has slid 12 percent. If the two nations can nail down a broad trade agreement, a sharp relief rally may ensue. But that may not come anytime soon.
“Our base case is that trade tensions are unlikely to abate,” analysts at Barclays wrote in a report. Right now, there is a 10 percent tariff in place on roughly $200 billion worth of Chinese imports. That rate is set to rise to 25 percent in 2019, and China may retaliate by further restricting U.S. imports. If that happens, the fourth-quarter earnings season could be a bruising one for the tech and industrial sectors as firms issue year-ahead guidance.
Even as some of these sectors face their own distinct set of challenges, the broader backdrop for stocks looks positive.
“The environment remains a very good recipe for stocks—high-single-digit earnings growth, still low interest rates, 2.5 to 3 percent GDP and increased dividend growth,” wrote analysts at BMO Capital Markets in a client note.
Also, full employment levels are leading to rising wages, providing a lift to consumer spending. And robust profits have pumped up corporate cash balances as well.
Year Of The Consumer