US equity markets have been driven by the technology sector over the past several years as investors allocated to this key area of the US and increasingly global economy. For some time, technology stocks have delivered superior growth characteristics that normally could be sought in US Small Cap equities or the world’s emerging markets. Current valuation readings in technology are stretched as compared to the overall market and their own longer-term averages. The key going forward is whether the dominant technology companies, often referred to as the FAANG* stocks, can continue to deliver strong earnings this season as well as in coming quarters. A concern to many – including us – is that the rally in large cap stocks has become increasingly narrow and dependent on these companies. However, market leadership appears to be rotating into US Small Caps which could drive equities going forward.
*Facebook (FB), Apple (APPL), Amazon (AMZN), NetFlix (NFLX) and Alphabet – widely known as Google (GOOG/GOOGL)