• Wealth Management

New Headwinds for Tech Stocks

Technology stocks have stumbled lately. That doesn’t necessarily signal a broad market downturn, but diversifying away from tech leaders may make sense.

After a nearly 50% run-up this year through late November, technology stocks have hit a speed bump in the past two weeks, reducing this year’s gains to 36%. That’s still excellent, but many investors are now wondering if the recent tech selloff could be the start of steeper losses or a broader market meltdown.

I don’t see it that way. I think some new headwinds, such as tax reform and rising interest rates, have the potential to harm the technology sector. Investors are responding to them in a rational, measured way by moving out of growth and momentum-driven names and into more value-priced, high quality stocks. 

Since I believe this rotation could continue into the middle of 2018, it makes sense to diversify your portfolio and add some of the small-caps, financials and value plays that may be among the next market leaders. 

I still think investors should have a hefty weighting to technology in their portfolios, but keep in mind these three developments: 

  • Tax reform is not that beneficial to tech. Many tech leaders already have effective tax rates near the proposed new level of 20% to 23%. Consumer, financial and telecom firms have more to gain from potentially lower tax rates. 
  • Higher interest rates look likely. We believe inflation may perk up as global growth continues. It is likely to lead to higher rates, which could surprise investors. Tech stocks would likely be vulnerable if rates rose sharply, but financials could benefit. 
  • Market sentiment could shift. Given the popularity of tech stocks in recent years, the sector may be extra vulnerable to a selloff if earnings growth fails to live up to expectations.

If you own some of the large-cap, high priced tech stocks that have dominated, consider branching out to smaller and more value-priced names. If interest rates rise next year, financial and consumer sectors may hold more opportunity than this year’s tech favorites.

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