Technology
The tech sector is sagging on the under the weight of contracting sales growth. There is no imminent reprieve, underscoring that the cresting in overall sector margins is likely to accelerate. Consumer spending on technology products and services has climbed as a share of total outlays (second panel), but the sector is not receiving support elsewhere. Businesses are being forced to retrench. Profits are under pressure while balance sheets are increasingly debt-laden. As a result, executives are unable to pursue expansion. Companies have spent the bulk of the money raised to repurchase shares rather than to invest. Why would that improve if the gap between the return on and cost of capital continued to close, as is currently the case? Both our capital spending model and the narrowing gap between the return on and cost of capital warn that business investment on tech goods is headed south (third and fourth panels). Importantly, the financials sector, a large technology spender, is already laying out an historically high portion of its sales on capital spending. Financial sector investment is likely to be reined in now that the credit cycle has taken a turn for the worse and more money needs to be set aside for bad loans (bottom panel), which will remove another support for tech final demand. We reiterate our underweight tech sector view, please see yesterday's Weekly Report for more details.
Stocks whipsawed violently last week. Volatility could intensify if recent whiffs of a domestic economic slowdown proliferate and the Fed still adopts a more hawkish tone.
The overall tech sector has been under pressure as a consequence of shoddy profits. We do not expect any imminent reprieve, particularly within the heavyweight S&P computer hardware, storage and peripherals index. This group is highly sensitive to swings in capital spending budgets. The latter are under pressure from a narrowing in the gap between the return on and cost of capital in the overall business sector. New orders for computer hardware products have dropped into the contraction zone, warning of potential shrinkage in top-line growth. To make matters worse, wage inflations has surged in recent quarters. That is a recipe for productivity disappointment. Until overall business sector profits are poised to recovery on a sustained basis, demand for hardware is likely to stay on its heels. We reiterate our underweight position. The ticker symbols for the stocks in this index are: BLBG: S5THSP - AAPL, EMC, HPE, HPQ, SNDK, WDC, NTAP, STX.
Asian exports (volumes and prices) have been contracting, as global trade has hit a wall. While this broad deflationary backdrop has taken a toll on Asian DRAM prices (bottom panel), global semiconductor supply/demand imbalances best explain the industry's dwindling pricing power. Not only are global semi sales shrinking, but also BCA's global semi inventory proxy is surging. Taken together, our global semi sales-to-inventories (S/I) ratio is contracting at an accelerating pace, signaling that an inventory liquidation phase is looming. Historically, the S/I ratio has been an excellent leading indicator of semi earnings and the current message is to expect a significant drop in profits (middle panel). Bottom line: Steer clear from the broad tech sector, continue to underweight the tech hardware, storage & peripherals sub-index and we reiterate our high-conviction underweight status for the S&P semis index. The ticker symbols for the stocks in the S&P semis index are: BLBG: S5SECO - INTC, QCOM, TXN, AVGO, NVDA, ADI, SWKS, XLNX, MU, LLTC, MCHP, QRVO, FSLR. The ticker symbols for the stocks in the S&P technology hardware, storage & peripherals index are: BLBG: S5THSP - AAPL, EMC, HPE, HPQ, SNDK, WDC, STX, NTAP.
In mid-April we cautioned investors not to position for a betterment in tech sector earnings despite the seemingly low sell-side analyst hurdle. A slew of tech heavyweights have come up short this earnings season both on the top and bottom line fronts. More importantly, bellwether Apple struck a cautionary note on consumer electronics end-demand, especially in China and warned that profit would underwhelm in the current quarter. This is disconcerting especially given Apple's global reach, and is signaling that the tech sector tide is likely turning following a nearly uninterrupted decade-long relative share price bull market run. The top & middle panels of the chart show that this outperformance phase is running on empty as relative profit trends have given way. Meanwhile, on the demand side the outlook remains grim. Overall tech new order growth is contracting and the message from weakening Korean and Taiwanese exports is that more pain lies ahead for tech sector profitability. Deflating Asian export prices are underscoring that semis should also be avoided (see the next Insight).
Bearish sentiment is a red herring, as most other measures of investor positioning point to a strong undercurrent of bullishness. That is contrarily worrying.
An Insight yesterday showed that the overall technology sector was likely to record its worst quarterly earnings performance in four years. The highest beta components of the sector are most at risk. For instance, the semiconductor industry is losing its main source of support, namely an M&A premium. Last year's mini-M&A frenzy is petering out, which will put the onus on profits to support relative performance. However, global chip sales continue to deteriorate, and leading indicators such as Chinese electronics imports and Emerging Market currencies continue to warn of tepid chip demand. With chip producer inventories still growing at a historically rapid clip, there will be downward pressure on average chip selling prices. TSMC's profit warning earlier this week likely provides a good read for the overall industry, and we reiterate our high-conviction underweight rating. The ticker symbols for the stocks in this index are: BLBG: S5SECO - INTC, QCOM, TXN, AVGO, NVDA, ADI, SWKS, XLNX, MU, LLTC, MCHP, QRVO, FSLR.
The S&P technology sector is forecast to deliver its worst quarterly earnings performance since 2012/2013, when the sector suffered a relative performance steep correction (top panel). That period was marked by a downturn in capital spending momentum, and a contraction in technology new orders-to-inventories. A similar backdrop is currently unfolding. BCA's Capital Spending Model has moved sharply lower, heralding share price underperformance. In addition, demand for tech goods remains anemic, as proxied by tech new orders and exports (second panel). That represents a headwind to future production growth, and by extension, productivity. The implication is that tech sector deflationary conditions are likely to remain intense, and it is too soon to position for better technology earnings. We remain underweight the overall tech sector.
The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.
The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.