Reflecting on July: S&P 500 IT Index Under-Performance

Mark Nelson covers the under-performance of the tech sector in July, including its causes and what investors should take away from it

Reflecting on July

WHAT HAS HAPPENED?

Most major equity indices posted solid gains during July as some of the fears surrounding potential trade wars faded, economic data held up generally well and earnings season got off to a good start. The tech sector, however, experienced a mixed month, with the S&P 500 Information Technology index posting 2% gains, below that of the broader S&P 500 index and down sharply from its highest level, having been the best performing sector with gains of almost 7.5% by the 25th of the month.

WHY?

The decline came as a couple of the largest names in the space provided disappointing earnings reports. Facebook, the world’s leading social network site, which has been plagued by issues surrounding potential data misuse, announced that it expects high single digit percentage revenue declines in both the third and fourth quarter of this year due to a combination of currency headwinds and changes to its user’s privacy choices. Facebook shares ended the month 11% lower and almost 21% off their peak. Meanwhile, shares in video streaming company Netflix were down 14% during July as it missed its own net new subscriber guidance. The company reported 5.2m net new subscribers, short of the 6.2m that management had guided towards at its last earnings announcement. Its outlook for the next quarter also proved to be underwhelming.

WHAT SHOULD YOU TAKE AWAY FROM IT?

The NYSE FANG+ Index, which includes a number of the world’s largest tech companies, formally entered correction territory at the end of July, having fallen by more than 10% from its 20th June peak. However, the decline should be considered in the context of the stellar performance of these stocks in recent years. Since the FANG+ Index was created in 2014, it has rallied by 183% and some of its constituents have performed even better. Additionally, the decline in Facebook and Netflix shares in July follow years of strong performance, with Facebook up 41% and Netflix over 250% in the last two years, even when taking into account the recent falls.

It is also important to remember that not all technology stocks are the same. Memories of the dot.com bubble and the indiscriminate selling of tech stocks in the early 2000’s, continue to underpin fears of a similar broad-based crash. However, while these companies share sector classifications, they differ in a number of ways including the services they provide and the way in which they make money. While Facebook and Netflix shares fell in July, Amazon, Alphabet and Apple shares rose. Amazon and Alphabet both reported strong second quarter earnings and Apple this week became the world’s first public company to achieve a $1tn valuation. At Killik & Co, we continue to search for companies with exposure to long-term structural growth opportunities which include a number of stocks within the technology sector. If you would like more information on these stocks, or if you have any questions then please contact your Investment Manager.

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