A word of caution from Morgan Stanley’s equity strategists:
« The latest burst of Tech outperformance has not been accompanied by superior EPS trends. Just now Tech shows few signs of stopping (or even slowing); for example: i) post its largest 1m outperformance versus the S&P since 2012, the NASDAQ is now 2.7SD above its 12M relative average; ii) 80% of constituents of MSCI ACWI’s IT index outperformed the market over the last month, the highest breadth reading since 2003. Amid all this euphoria we’d encourage investors to keep a close eye on EPS trends as the latest burst of price outperformance has not been accompanied by EPS outperformance. »
It seems investors have started noticing.
According to a recent review of fund managers portfolio positioning done by BofAML’s quant strategy team, « in February, funds reduced overweight positions in Tech and Consumer Discretionary while increasing exposure to Financials. »
In aggregate, funds reduced position by $40 billion, while « strong macro and earnings data support rotation towards cyclicals. »
Europe Technology ?
With €447 bn of cumulated market cap as of March 16, 2018, Europe tech sector looks pale in comparison with its US counterpart
Like its US counterpart, the European tech sector has been performing handsomely over the last few years.
Stoxx Europe 600 Technology (SX8P) Price History
Stoxx Europe 600 Technology (SX8P) EPS & P/E History
The above graphs tend to give a false impression of « everything’s going fine in Europe ». Well, that’s not entirely true.
YTD (as of March 13), European technology stocks were up 4.6%. Contribution from P/E was 4.9% and the one from EPS was -0.3%… Not a very reassuring trend.
Currently the sector trades on a P/E multiple of 21.3x according to Bloomberg estimates and a P/B of 3.3x.
In 2017, the SX8P index grew 19.3% of which 5.2% came from P/E multiple expansion and 13.4% from earnings growth/revisions.
2018 outperformance of the sector looks less sound than the one observed in 2017, which justifies some caution going forward.