looking beyond macro reveals healthy us technos

Bill O’Neill looks at the micros not just the macros in the US and predicts a bumpy short-term ride for the US technology sector but with a far healthier long-term picture.

looking beyond macro reveals healthy us technos


Generally, second quarter US earnings expectations do not appear too demanding. It seems, though, that several companies are giving more cautious guidance for the remainder of the year given earnings expectations for full-year 2012 are on the high side. It is unsurprising, therefore, to see many analysts slightly downgrade their earnings numbers.

Corporate earnings down

In line with this trend, the our US equity strategy team has elected to slightly reduce its already below-consensus earnings expectations for 2012 and 2013. For full year 2012, chief US equity strategist, Savita Subramanian, now predicts $102 per share of earnings for the S&P 500 Index, down from previously $103.50 (and compared to consensus forecasts of $105).

We believe the primary driver of lower earnings is due to lower revenues from the energy sector.

One sector that we have favoured through the first half of the year is US technology. This part of the US market has been one of the strongest performers so far this year, rising by 11.2% in price terms and justifying our earlier optimistic view.

However, there have been hints more recently that the sector might find it harder to outperform the broad index in the short term. The reluctance of companies to spend existing cash on technology investments, despite resilience in their profitability and strong cash positions, is arguably the chief culprit for lower technology demand.

A lack of appetite for investment may stem from macroeconomic concerns as well as elevated political risks (surrounding the eurozone crisis and the potential US fiscal cliff). The weakness in technology demand is, to some extent, reflected through disappointing corporate earnings for the sector from many of the technology companies that have reported in the first week.

Technology positioning up

Additionally, investor positioning in technology remains particularly bullish. According to our fund manager survey of investors, technology is the most overweight sector globally. This leaves the sector potentially vulnerable in the short term should more companies report weaker than anticipated earnings (this week’s earnings results are primarily from technology companies, potentially offering a good indication of the sector’s profitability over the second quarter).

We remain structurally positive on the sector for the reasons we have highlighted previously, namely sustainable margins, high global sales exposure and an improving multi-year capital spending cycle. However, there may be better opportunities to revisit the sector towards the latter part of the year, should confidence in the economic cycle improve and capital spending by companies increase.


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