It was a big week for the technology sector

Jul 30, 2021 | Mike Allington


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Many large technology companies reported second quarter results over the past week that were solid overall, with the odd exception here and there. It reflects the favourable demand environment for the range of products and services they offer.

We’re in the middle of the dog days of summer. Global equity markets remain in the midst of a very strong year, with Canadian, U.S., and European equities sitting near all-time highs.

 

The U.S. Federal Reserve garnered some attention over the past week, as it always does. Its updated economic outlook was largely in-line with what investors were anticipating.  And the Fed is not likely to alter one of its major monetary tools – its asset purchase program - until the end of the year. The other noteworthy development in recent weeks has been the earnings season, which has been good enough to meet elevated expectations.

Many large technology companies reported second quarter results over the past week that were solid overall, with the odd exception here and there. It reflects the favourable demand environment for the range of products and services they offer. Expectations were high, and so the stocks themselves did not necessarily respond as positively as some may have wanted, serving to remind investors that stocks are effective at reflecting expectations, and it’s the future that matters more than the past.

 

Generally speaking, the long-term earnings outlook for the sector remains encouraging given secular forces that should continue to drive demand. In addition, the reopening of economies should act as an additional tailwind. But, it is worth acknowledging that the pace of growth may decline from the exceptionally strong levels seen in recent quarters. This moderation can be characterized as a return to more normal growth as the pandemic-driven benefits wane and the year over year comparisons simply become harder to sustain. Cost pressures are also building, driven by supply chain issues, and are expected to be a challenge over the intermediate term.

 

Investors should also be mindful of two other issues facing the technology sector: interest rates and regulation. Both present potential headwinds that may come and go over time. The risk of higher interest rates was a concern earlier this year when inflationary pressures began to mount. Higher rates present a risk to the valuation that investors assign to future earnings and cash flow. This concern has faded in recent months, but is bound to resurface at some point in the future.

 

Meanwhile, regulation is not a new worry either.  But, regulatory uncertainty is poised to escalate in the U.S given an administration that appears willing and eager to take a harder stance against big tech. It’s hard to predict the outcome of any legal matter, but the mere existence of more investigations and court cases could create new sources of uncertainty.

 

We believe technology will remain one of the most influential industries in the global equity markets going forward. But, as with all investments, it’s important to recognize there are opportunities and risks, and portfolios should be managed accordingly by ensuring appropriate exposure and maintaining proper diversification.

 

Should you have any questions, please feel free to reach out.

 

Have a great long weekend.

Mike