Veteran strategist Ed Yardeni stated that technology stocks have returned to attractive levels for investors willing to adopt a long-term perspective, following a retreat from last year's record highs.
Due to uncertainties surrounding the impact of artificial intelligence on software businesses, coupled with effects from the Iran conflict, the information technology sector has declined 13% since hitting a historic closing peak in October. During this period, earnings expectations for the sector have been revised upward at an accelerating pace, driving its price-to-earnings ratio to 20.6 times, nearing the S&P 500's 19.6 times.
"For investors with a multi-year time horizon, this represents an attractive entry point," Yardeni said in a report sent to clients on Sunday.
The S&P 500 Information Technology Index rose 0.4% on Monday, poised for a fourth consecutive day of gains. However, the sector remains down 7.2% year-to-date, weighed down by concerns over excessive valuations, fears that AI could disrupt the software industry, and a decline in market risk appetite.
Combined, the Information Technology and Communication Services sectors account for the majority of the S&P 500's market capitalization. Yardeni noted that this concentration has surpassed the peak seen during the dot-com bubble era. While this comparison might unsettle some investors, the current high market concentration is "more supported by earnings" compared to 26 years ago.
"Today, these two sectors' expected earnings share is 42.0%, only 1.6 percentage points lower than their market cap share," Yardeni said. "At the peak of the dot-com bubble, the gap between market cap share and earnings share exceeded 15 percentage points. The current concentration is justified."
Yardeni is not alone in viewing the information technology sector's valuation as attractive. Wells Fargo Investment Institute has upgraded its rating on the sector from Neutral to Favorable, citing its underperformance relative to the S&P 500 and its long-term growth prospects driven by AI investment.
"The gradual pullback over the past few months has brought valuations to more attractive levels, and we believe the pessimism surrounding the sector is overdone," strategists at the firm said.
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