The performance of technology stocks over the recent past has been striking: In 2017, for example, the information technology sector of the S&P 500 posted a 38% return, while the broader S&P 500 Index gained 22% (Source: Bloomberg data). Perhaps even more impressive is the fact that technology is responsible for almost 30% of the total gains of the S&P 500 Index over the last five years (Source: Bloomberg, as of 2/28/18).

In investing, however, past is not prologue. So the question is: Can the good times roll on? We may not see another year like 2017, but there are three reasons why technology continues to be one of our top sector picks.

Strong earnings momentum

The BlackRock Investment Institute recently upgraded U.S. equities from neutral to overweight on the basis of significant earnings growth expectations driven by a supportive macroeconomic environment—and potentially boosted by fiscal stimulus. This thesis equally applies to technology.

This reporting season, 88% of IT companies in the S&P 500 Index posted positive earnings surprises—the highest proportion of all the sectors—while recording 22.5% aggregate year-on-year earnings growth compared to the broad Index’s 14.3% (Source: BlackRock, Bloomberg, as of 3/5/2018). This has translated into strong equity market performance year-to-date, as depicted below. Notably, the other high-flying sector—consumer discretionary—also includes two tech-powered giants: Amazon and Netflix.

Significant cash balances

Many established technology companies are cash rich, commanding strong balance sheet positions and ample investment firepower. (Source: Bloomberg, as of 11/2/2018).

This offers a number of potential advantages. First, these companies potentially are insulated from the impact of rising interest rates, and may even benefit. As we recently noted, technology historically has been among the sectors the most insulated from yield curve shifts.

In addition, one of the consequences of the recent tax legislation is the prospect of companies repatriating cash back to the U.S. at favorable rates. This increases the potential for dividends, share buybacks or increased mergers and acquisition activity. At the same time, increasing capital expenditure or research and development (R&D) spending may be supportive of the sector in the longer term.

Investing in long-term trends

The impacts of technological disruption extend beyond the confines of old fashioned sector classifications. As we highlighted in October, investing in technology allows investors to tap into large scale, transformational shifts in the way entire industries operate—whether it be the growth of “big data,” cloud-based enterprise and infrastructure solutions, cyber security or the intrinsic importance of semiconductors. Additionally, the growth of online shopping is displacing traditional brick-and-mortar retail and could change the face of commercial real estate markets. These forces result in the tech sector exhibiting a strong secular growth profile and in our view, help justify a premium in the form of higher valuations.

Investors can choose from a wide range of tech exposures.  For example, exchange traded funds (ETFs) tracking broad technology indexes can include large cap technology stalwarts. Alternatively, ETFs tracking more focused sub-indexes allow investors to target companies with network and cyber security business lines or a software focus. Investors seeking a more economically sensitive exposure may consider a semiconductor ETF, providing access to the growth of companies that design, manufacture or distribute semiconductors—the vital components of many electronics and computer devices.

Bottom line

We believe earnings momentum, strong balance sheets and economy-wide transformational forces of innovation and disruption can help provide both cyclical and structural support for technology stocks in 2018. Investors seeking exposure to technological growth can consider taking a targeted approach to their sector definitions.

Featured funds

iShares North American Tech ETF (IGM)

iShares PHLX Semiconductor ETF (SOXX)

iShares North American Tech-Software ETF (IGV)

iShares North American Tech-Multimedia Networking ETF (IGN)

Chris Dhanraj is the Head of the ETF Investment Strategy team in iShares and a regular contributor to The Blog.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Funds that concentrate investments in specific industries, sectors, markets or asset classes may under-perform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision. This post contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by The NASDAQ OMX Group, Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with The NASDAQ OMX Group, Inc., ©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. 443766

BlackRock Blog