Tech stocks have slid after the US Senate passed its
version of tax reform.
One analyst at Credit Suisse thinks lower prices means
that now is the time to buy.
Strong business fundamentals that have propelled tech
will likely continue, leading to strong stock performances for
many tech companies.
As tax reform made its way through the US Senate, investors
started the bill’s impacts if it passed. On Saturday,
the Tax Cuts and Jobs Act did pass, bringing many of the
details of the bill to light. That set off a
wave of trading for investors hoping to better align their
portfolios to take advantage of the Senate’s bill, which
still needs to be reconciled with the House’s and signed by the
President before becoming law.
Monday and Tuesday saw a general
rise in financial stocks and a decline in tech companies.
According to analysts at Credit Suisse, though, the rotation will
“TECH+ is our favorite sector given its strong fundamentals,”
Jonathon Golub, an analyst at Credit Suisse said. “We believe an
investor’s time horizon should determine their focus on tax
For those investing for the long term, Golub said the tax bill is
secondary to business fundamentals. Basically, investors will be
focused on playing tax reform in the short term, but it won’t
change the big picture.
Because the companies that are most affected by tax reform are
ones that have a majority of revenue in the US, Transportation,
Retail, and Financial companies have gotten a boost immediately
following the passing of the Senate bill, according to Golub.
But, tech has largely outperformed the general market in 2017,
and Golub said that it will likely continue to do so after the
rotation. Golub points out that the tech sector is in the top
four sectors for revenue growth, earnings growth, and return on
On Tuesday, Golub pointed out that the tech sector is only
slightly more expensive than the rest of the market on a
price-to-earnings ratio basis. Tech has a P/E ratio of 19.8,
while the S&P 500 currently has an 18.2 P/E ratio. At the end
of 1999, before the tech bubble burst, the ratio for the tech
sector was nearly double that of the general market.
“The fundamental backdrop is much stronger for this group than
other sectors. Further … any pressure on valuations represents
a buying opportunity for longer-term investors,” Golub said.