Why Technology Is Proving Surprisingly Defensive

Russ highlights the surprising resilience of technology stocks this year.

The last time I wrote about technology stocks the world looked very different. In mid-February the market was at an all-time high, unemployment was at a 50-year low and investors were starting to contemplate a Sanders Presidency.

Despite all that has happened, tech stocks are up for the year. This compares to a -9% return for the S&P 500 and a meltdown in most cyclical sectors. While the future shape and speed of the recovery is still very much in doubt, I still believe tech and tech-related names can lead the market, particularly if volatility returns. Here is an update on the three reasons I gave back in February and why they’re still valid today.

1. Earnings and cash flow remain resilient.

Previously I highlighted that tech valuations were justified based on exceptional profitability. While tech earnings have been hit along with everyone else, they are holding up remarkably well (see Chart 1). This is not surprising. Although the lockdown is crushing spending, tech continues to dominate wallet share, both for individuals and companies. A recent Fortune 500 CEO poll found that 75% of companies plan to increase technology spending.