San Francisco - Technology companies have been a driving force behind the US stock market’s recent record rally, and despite mounting evidence of stretched valuations the sector remains a top pick for investors expecting a wave of capital expenditures by US corporations.
Corporate tax cuts and reduced regulations planned by President Donald Trump will give companies reason to spend more on cloud computing, factory automation and smart connectivity that will directly benefit Silicon Valley, many on Wall Street believe.
“The tax cuts are going to promote business investment across all industries, and the business investment is largely going to be in technology,” said Doug Cote, chief market strategist at Voya Investment Management in New York.
Strong performances from big names including Apple and Facebook have helped make technology the strongest S&P 500 sector so far this year, surging 10 percent compared to the broader index’s 6 percent rise. In the past month, investors have poured $325 million into to the US-listed Technology Select Sector SPDR Fund, according to ETF.com, which tracks fund flows.
“We may be due for a little bit of a pull back, but we’re still buyers on weakness because we like the longer-term outlook over the next two to three years,” said Terry Sandven, chief equity strategist at US Bank Wealth Management.
The proliferation of smart, connected devices in homes, factories and stores is leading to the collection of unprecedented amounts of data and creating demand for more computing power to analyse it.
Spending on cloud computing will grow by 21.5 percent a year to 2020, almost seven times as fast as overall IT spending, according to a recent estimate by market research firm IDC.
Improved employment and consumer confidence have also been behind investors’ optimism about tech, helping offset concerns about lofty valuations.
After an eight-year US stock market rally, nearly all sectors are trading at earnings multiples above their long-term average, but none more so than technology, according to data.