Stay Long Tech and Growth

My assumption is that the market, while still vulnerable to trade-related headline risks, will operate in a somewhat calmer atmosphere during the second half. Growth is likely to slow but the U.S. should avoid a recession. At the same time, price pressures associated with tariffs have proved modest and inflation has, thus far, been (mostly) contained. This should help keep long-term rates range-bound, as they have been for most of the year. An environment of positive but slow growth and stable rates should support growth over value, which, by contrast, has historically tended to perform best during periods when growth is accelerating.

From a valuation standpoint, while tech is not cheap, valuations are within range. According to data from Bloomberg, the tech heavy Nasdaq 100 is trading 25x FY1 estimates and 22x FY2. Based on price-to-earnings ratios, the Russell 1000 growth index trades for approximately 1.8x the value index. Relative valuations are right around the five-year average and down from the post-pandemic peak of 2x.

Elevated growth valuations are arguably justified based on profitability, margins and still stellar earning growth. We continue to live in a world in which mega-cap tech companies remain remarkably profitable, and despite large capital-spending plans, capable of driving strong earnings growth. On a global basis, the MSCI World tech sector is expected to lead the rest of the market in both earnings and sales growth (see Chart 1).

After a huge run, I doubt whether tech stocks are likely to move up in a straight line. Many of the top names are up 50% or more from the April lows. We are also entering a seasonally weaker period for stocks. That said, rather than trim excessively, I would use any late summer weakness to add to core positions in AI-related themes, software and communications. Looking out 6-12 months, I believe these names have the potential for further gains.

Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team as well as the lead portfolio manager on the GA Selects model portfolio strategies.

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