Tech sector continues to lead

20 June, 2017

Investors fell in love again with tech stocks. The sector which was held responsible for the pullback in equities in the last two weeks is driving indices to record highs. Suddenly valuations are no longer a worrying factor, and Fed tightening is less of a concern. It seems like bargain hunters were waiting for the opportunity to dive in. Although many market participants considered tech stocks either expensive or bubble-like after the S&P 500 information technology sector soared 22% from the beginning of the year to 9 June, it still doesn’t make sense to compare this rally with the tech bubble burst in 2000. The current leaders in the sector are the FAAMG’s “Apple, Alphabet, Microsoft, Amazon, and Facebook”. Their aggregate average forward P/E ratio stands at around 23.5, which is less than half the forward P/E for big tech stocks in 2000. Cash balances are more than six times higher than the levels of 2000 and cash flows are in a much better shape. Although valuations are not comparable to 2000, they are still high in contrast to previous levels. Given that earnings are expected to continue growing at a rapid pace, the overstretched valuations are justified, and any dip will be seen as an opportunity to buy.

Comments from New York Fed President William Dudley provided the dollar with a boost yesterday. He seemed confident that inflation would return as the jobs market pushes wages higher. More interestingly, he said that he is not paying too much attention to signals of concern from bond markets, which has been flattening for some time. Fixed income traders were sending negative messages more recently, the most obvious being that they don’t believe the tightening cycle path will continue as expected. Although yields on ten-year bonds moved higher after Dudley’s comments, they are still not signaling high confidence in economic growth. Thus, economic data in the next couple of weeks should be robust enough to convince bond investors that the economy is on the right track, and for the dollar to continue appreciating. Fed Vice Chair Stanley Fischer is due to speak today. If he shares Dudley’s views, the dollar is likely to continue rallying. 

Brexit talks began yesterday. The first day of the negotiations ended calmly with both sides agreeing to focus on Britain’s exit bill and the rights for EU citizens living in the UK and vice versa. It will probably take some time for negotiations to start influencing the Pound’s direction. Instead, investors today will focus on what BoE’s Mark Carney has to say after three MPC policymakers voted to raise interest rates last week. Rising prices and falling wages is one of the biggest challenges a central bank can face, and investors need more clarity on what tools are available to tackle these problems.

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