U.S. Tech Stocks Ride the Economic Cycle

By Heidi Richardson, Global Investment Strategist at BlackRock

The U.S. tech industry, particularly blue-chip, mature companies, has room to run in this expensive bull market.

We’ve talked about the hefty balance sheets held by some of the best-known, established brands, which can help them deliver returns to shareholders. And we’ve discussed how their strong quarterly earnings support their higher valuations.

Another reason we like mature U.S. tech is that it’s a cyclical industry. In other words, when the economy gets stronger, cyclical sectors like tech have tended to generate higher revenues through increased consumer spending. Companies with higher revenues have a greater opportunity to increase shareholder-friendly policies compared to industries that are “defensive” in nature.

Due to continued resilience in U.S. economic growth and anticipation that the Federal Reserve will likely raise interest rates this year, we’re starting to see investor sentiment transitioning from defensive to cyclical stocks.

As the economy grows, consumers tend to spend more on discretionary items and companies feel confident to invest in their expansion.

The U.S. tech sector is particularly poised to take advantage of this cyclical economic shift.  Health care, finance and other service industries are likely to increase investment in information technology―everything from data storage to new desktop computers. Also, the large millennial population will drive the usage of mobile technology and online networks.

And historically, tech has weathered interest rate hikes better than many other sectors. Today, the overall tech sector holds more than half of total corporate cash reserves in the U.S., which means if rates rise, mature U.S tech will better positioned to handle increasing borrowing costs and invest in their own growth.

We still see solid upside potential in U.S. tech stocks.  When’s the best time to buy? We anticipate increasing volatility in the stock markets this year, and tech is no exception. So keep an eye on market pullbacks and consider investing on the dips.

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First Trust Nasdaq Technology Dividend Index Fund (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio.  Current yield on the portfolio is 5.56% (as of 23 February 2015).  year to date, the portfolio is up 2.29%.

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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