| | | Tech is floundering – but ‘critical’ selectivity can still offer you outperformance – BMO
Mar. 04, 2025 2:51 PM ET
By: Monica L. Correa, SA News Editor
Technology’s (NYSEARCA: XLK) 5.5% underperformance vs. the S&P 500 ( SP500) is the worst start to a year in the post-financial crisis era, and the worst two-month period for this bull market, said Brian G. Belski, chief investment strategist at BMO Capital Markets.
The performance of technology (NYSEARCA: XLK) against the S&P 500 from January through February in 2023 was 6.2%. In 2024, the outperformance was 3.5%. This year, the sector has underperformed the broader market by 5.5% in the first two months.
But the equal-weighted sector (NYSEARCA: RSPT) is also only marginally lower year-to-date – -2.62% vs. -5% for the weighted sector – suggesting that this slump “is not as bad as it appears,” and could reinforce the important for stock picking, compared to two years ago, said Belski.
“The 3.5% outperformance of the equal-weighted sector is almost a mirror image of underperformance levels for 2023-2024 and is also one of the best two-month relative performance periods since 2007,” he said.
Further, outperformers within the technology sector have continued to deliver nearly double-digit average gains. More than 46% of the sector is outperforming – compared to 40% in 2024 – and the performance spread between outperformers and underperformers has also increased.
Also, “the movement among technology stocks has become less synchronized with individual stock prices moving more independently of one another from a directional standpoint,” Belski said. “The 126-day intra-stock correlation has significantly dropped since late 2022 and is also considerably below its three-year moving average.”
Lastly, he said that investors should consider GARP (growth at a reasonable price) investing strategies to look for outperformers within technology, as this style has been beneficial during periods of falling or below-average intra-stock performance correlation.
“Reasonably valued companies with better growth prospects are the stocks that are typically rewarded under these conditions,” he said.
“Given the idiosyncrasies of Technology (i.e., higher growth, higher valuation, higher market cap) one approach we use to identify opportunities is to take a multi-factor rank based on the market cap, FY2 P/E, and FY2 EPS growth for stocks within the sector and select the stocks that fall within the upper half of the composite rank for performance purposes.”
GARP strategies within the technology sector outperformed the equal-weighted and market cap-weighted sector indices in the subsequent six and 12 months after periods where the technology relative valuation was above average, he said.
Among the stocks that fit this theme include:
- Akamai Technologies, Inc. ( AKAM)
- Advanced Micro Devices, Inc. ( AMD)
- CDW Corp. ( CDW)
- Cognizant Technology Solutions Corp. ( CTSH)
- Dell Technologies, Inc. ( DELL)
- Enphase Energy, Inc. ( ENPH)
- EPAM Systems, Inc. ( EPAM)
- F5, Inc. ( FFIV)
- First Solar, Inc. ( FSLR)
- GoDaddy, Inc. ( GDDY)
- Gen Digital Inc. ( GEN)
- Corning Inc. ( GLW)
- Hewlett Packard Enterprise Co. ( HPE)
- HP Inc. ( HPQ)
- Intel Corp. ( INTC)
- Jabil Inc. ( JBL)
- Juniper Networks, Inc. ( JNPR)
- Keysight Technologies Inc. ( KEYS)
- Micron Technology, Inc. ( MU)
- NetApp, Inc. ( NTAP)
- NXP Semiconductors NV ( NXPI)
- ON Semiconductor Corp. ( ON)
- PTC Inc. ( PTC)
- Super Micro Computer, Inc. ( SMCI)
- Seagate Technology Holdings PLC ( STX)
- Skyworks Solutions, Inc. ( SWKS)
- Teledyne Technologies Inc. ( TDY)
- TE Connectivity plc ( TEL)
- Teradyne, Inc. ( TER)
- Trimble Inc. ( TRMB)
- Workday, Inc. ( WDAY)
- Western Digital Corp. ( WDC)
- Zebra Technologies Corp. ( ZBRA)
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