Is Now a Good Time to Buy Tech Stocks?

Are current valuations in tech stocks, and the broader US market sustainable? And what does this mean for investors who favour passive strategies?

Dan Kemp 27 September, 2016 | 12:11PM
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In the United States, we think overvaluations are the biggest risk to investor returns at the current time; especially within some of the most popular sectors such as technology.

Underlying much of the distortion in United States equity values appears to be unrealistic earnings expectations. In tech stocks for instance, the past 10-year earnings growth has equated to 7.65% versus 0.83% for the broader market in real terms. This has resulted in a return-on-equity figure of 20.5% in tech stocks, which is far higher than the 20-year average of 17.9%, and the market average of 14.8%.

Whether these growth rates are sustainable is a source of contention, and is frankly impossible to predict with precision. For instance, with Apple (AAPL), Google (GOOG), Facebook (FB) and Microsoft (MSFT) making up more than 48% of the tech sector, the success of the iPhone 7 will have a material impact on the growth rates and therefore sector fundamentals.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Alphabet Inc Class C2,928.55 USD4.84Rating
Apple Inc148.85 USD-0.31Rating
Facebook Inc A312.22 USD-1.14Rating
Microsoft Corp323.17 USD4.21Rating

About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA