The recent recovery in stock markets has been at odds with economists maintaining a gloomier global economic outlook. The rally is largely driven by the optimism of economic recovery and a much stronger recovery in the technology sector.
The S&P 500 information technology sector has returned about 10% in 2020, including reinvested dividends. Although during the tech bubble of 1990s the sector has never booked over 14% of the S&P 500’s earnings, its profit contribution surged to more than 20% of S&P 500 net income in recent years.
It is likely that technology will play a significant role across different countries and cultures in future, generating better returns in the long run for these tech companies.
“I remain concerned about the impact of recession on parts of the tech sector, but I see continued growth driven by 2 megatrends: the shift to digital experiences and the shift to cloud computing,” wrote Nidhi Gupta, information technology sector leader and portfolio manager of Fidelity Select Technology Portfolio.
Gupta said she believes in companies that are moving traditional offline experiences online, and firms that are helping these companies to make better business decisions with their data, Fidelity added.
Socialising online and doing some of the things, like watching a movie and shopping with friends, virtually is a long-term megatrend that is expected to remain for years, regardless of global economic conditions amid the COVID-19 crisis. That’s why companies like Netflix, Facebook, Amazon.com, and Latin American e-commerce provider MercadoLibre are favoured.
“A related megatrend is that digital businesses with this treasure trove of data are increasingly looking to cloud computing to draw data-driven insights to improve their businesses. This is happening, via cloud services being offered at all levels of the information technology stack—infrastructure, platform, and software,” the American multinational financial services corporation added.
“Many companies are shedding their hardware and becoming software-led in every way,” Gupta adds. Companies that provide the cloud services to help their customers make better business decisions, which include HubSpot, Microsoft, Salesforce.com, Elastic, and MongoDB – all overweighted fund positions as of May 31.
According to Tipranks’ analyst consensus by sector, 148 technology stocks out of 595 were rated “Strong Buy”, 306 were rated “Moderate Buy”, 122 were rated “Hold”, 19 were rated “Moderate Sell” while none were rated “Strong Sell”.