Schwab Sector Views: What’s to Like and Dislike About Technology

Schwab Sector Views is our three- to six-month outlook for stock sectors, which represent broad sectors of the economy. It is published on a monthly basis and is designed for investors looking for tactical ideas.

Rarely is there any sector that has everything going for or against it—and that is true today of the Information Technology sector. What’s to like? It boasts impressive profitability—the best across all 11 S&P sectors; it’s positioned well if economic growth continues—even at a slower pace; and it has compelling fundamental underpinnings, as inflating input and labor costs are spurring businesses to accelerate investment in productivity-enhancing technologies.

But there also things to dislike about the sector. It is highly concentrated in just a few stocks, valuations are sky-high by almost all measures, and higher interest rates—all things equal—could make them even less attractive. We’re neutral on the sector now.

What’s to like

Strong profitability: One of the most important considerations for any sector is its fundamentals—the short- and long-term drivers for revenues and profits. A good yardstick of fundamental strength is return on equity (ROE), which measures how efficiently companies within a sector generate profits relative to shareholders’ equity. The Technology sector has the highest ROE of all sectors, as well as relative to its own historical average; and upward revisions to its expected earnings over the next year have been among the strongest of any sector.

The Technology sector has solid fundamentals