The current bull run was largely FAANG-led, right?
Sure, but in 2019, it has been tech hardware that has accounted for close to an equally large portion of the equity market outperformance. Tech hardware stocks, especially semiconductor stocks, have gone so high that the Global Chief Investment Officer of UBS Wealth Management, Mark Haefele, is warning against the group. Much of Haefele's bearish call is prompted by the recent round of tariff threats.
"Given this rising uncertainty, we have shifted our equity sector strategy from a modest pro-cyclical bias to a more defensive stance," Haefele said. "As part of this shift, we recently downgraded the technology sector to moderate underweight from neutral."
The S&P tech sector has risen 25% year-to-date. The Nasdaq has risen 17%. Both have outperformed the S&P 500's 14% 2019 gain. Semiconductor stocks like Qualcomm (QCOM) - Get QUALCOMM Incorporated Report and Micron (MU) - Get Micron Technology, Inc. (MU) Report have been a large part of that rally, rising 29% and 31% in 2019, respectively.
Haefele mentioned the newest tariff threats from Trump are particularly impactful to chip stocks, as they are on finished consumer electronics goods (especially smartphones) coming into the U.S. from China, as opposed to the industrial goods like metals that have been taxed.
But these stocks have run up.
"Despite declining net income growth in recent quarters, the tech sector has been the best-performing sector this year. Investors have looked through some of the near-term fundamental issues plaguing the sector, particularly within semiconductors and smartphones, and have been pricing in a rebound," Haefele said. He was referring to the decline in chip prices caused by oversupply in the industry. Now, analysts are looking for a pricing rebound, which will flow through to the bottom lines, enabling earnings growth across the sector to rebound.
"However, this expectation for a rebound appears increasingly at risk, given the uncertain macro environment," Haefele said.
He said semi stocks' one-year forward price-to-earnings multiples have expanded above their 25-year average, posing risk against the increasingly risker profile for the group. Qualcomm's multiple is at 17, on the higher end of its normal multiple. Micron trades at 17 times earnings as well.
What's worse is that, if tech stocks begin to lose steam, so might the broader stock market, as many market participants have been warning against heightened risk to cyclical stocks in the face of an accelerating global economic slowdown.
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