Chart of the Week: What has driven US tech returns?
Our expectations for the market’s favourite sector.
This week’s Chart of the week comes from the equity research team who conducted a sector review for US Technology.
Tech now constitutes nearly one-third of the US market, making it the largest sector in the index whilst other sectors such as energy have diminished in importance.
We find that the sector’s recent returns have been driven by changes in multiples. The chart below breaks up the return sub-components on a 10-year annualised basis.
We find that over the past five years, most of the real total return has been from valuation multiple and margin expansion.
What next for tech?
Despite ongoing momentum, we view the sector as moderately unattractive, primarily due to significant unfavourable asset class valuation* score. Our ten-year nominal expected annual return for the US tech sector is currently 3.96%.
We believe current high valuation (indicated by price-to-earnings ratios) should normalise to our long-term assumption. Relative to other US sectors, we rank tech the least attractive given our negative valuation reversion expectation.
*Asset-Class Valuation is based on a top-down adjusted base rate methodology that looks at spread/fair value and uncertainty for a given asset class.
You’re able to find previous editions of Chart of the Week here.
