Even if interest rates remain high for an extended period of time, there may be a case for betting on tech stocks.
Conventional wisdom suggests that high interest rates should punish the group, but investors still support earnings growth from mega-cap tech stocks, said Nate Geraci, president of The ETF Store.
“Investors see mega-cap technology as a high-quality strategy,” he told CNBC’s “ETF Edge” on Monday. “These companies are making tangible profits and have cash on their balance sheets.”
Technology is now the largest sector in the S&P 500, accounting for nearly 30% of the index, per FactSet. As of Tuesday, the sector’s earnings growth was expected to reach 23.7% in the first quarter, compared with 7.8% for the broader S&P, according to LSEG.
Geraci believes quality technology companies can maintain a leadership role even if the U.S. economy slows in earnest.
“In that scenario, investors want revenue, they want cash flow, they want something they can see, feel and touch right now. I really think it’s a no-brainer.”
Still, not all tech companies have fared equally well in recent months, with Cathie Wood’s series of Ark funds among the names under the most pressure. The flagship Ark Innovation ETF (ARKK) was down 15% since the beginning of the year as of Wednesday’s close, compared with a 9% rise in the S&P 500 index over the same period.
According to FactSet, Ark Innovation’s top three holdings are Tesla, Roku, and Coinbase. Mr. Geraci suggested that growth-oriented groups may be on the back burner for some time to investors.
“We’ve had some better-than-expected inflation statistics, and as we’ve seen with ARKK and others, investors are avoiding those speculative bets,” he said. “I think this makes investors reconsider betting on companies that will deliver returns far into the future.”
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