Information Technology Sector Rating: Neutral
Information technology is a highly concentrated sector, with just a handful of companies representing more than 50% of the sector’s weight, including the two behemoths Apple and Microsoft. The impact of stay-at-home behavior during the COVID-19 pandemic and increased consumer demand for personal computers, gaming hardware, software, and personal devices may slow as the positive impact from fiscal stimulus fades. And the ongoing supply chain issues continue to be a problem for sourcing semiconductors, resulting in high order backlogs for business and consumer electronics.
Business investment in information processing, software, and industrial equipment in the U.S. has increased significantly. The Technology sector continues to play a pivotal role in advances in robotics and automation, the transformation toward big data and cloud computing, the software and artificial intelligence that make it work, and smartphones, tablets, and network interfaces to enable us to use it. In the wake of the COVID-19 pandemic, higher wages, labor shortages and input inflation has resulted in an acceleration in investment in productivity- and labor-enhancing technologies.
Counterbalancing the strong fundamentals, investor optimism about future growth potential has pushed many valuation measures to well above their historical averages, and higher interest rates may weigh on investors’ perceived value of future earnings. Additionally, there are rising legislative and antitrust risks for some of the largest companies in the sector. Finally, strong relative price momentum earlier in the COVID-19 crisis has faltered in recent quarters.
Positives for the sector:
- Fifth-generation (5G) cellular network rollout and onshoring trends are themes that support fundamentals
- Generally strong balance sheets and earnings growth potential, with low funding costs
- Financial services technology and surging online retail sales are supporting cloud computing infrastructure and software
- Long-term growth tailwinds are likely as businesses enhance productivity with tech investment
- Capital expenditures have an improving outlook—particularly with the prospects of higher technology infrastructure spending
Negatives for the sector:
- Valuations are very stretched relative to the historical average, making expectedly higher interest rates a significant headwind
- Semiconductors are in short supply amid very low inventories and strong demand
- The sector is highly concentrated in a few stocks
Risks for the sector:
- Potential antitrust lawsuits in the U.S. and Europe.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market*
- Neutral: no current view on likely relative performance
* As represented by the S&P 500 index
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Information Technology sector.
What You Can Do Next
- Review your sector allocation. If you aren’t sure how to analyze your sector weightings, a Schwab Financial Consultant can help.
- Talk to us about the services that are right for you. Call us at , , or .