Technology’s earnings season is fast approaching. Expectations call for continued fundamental outperformance, and recent relative price performance hints that investors are buying tech rather than the broader market which sets a high bar. With the once-in-a-generation opportunity posed by AI, tech executives have been feverously making deals to help live up to these high-growth expectations.
The technology sector, as proxied by XLK (the iShares Technology Select Sector Fund), is expected to deliver higher earnings per share growth than the broader market this reporting period. The sector is expected to grow earnings 19.1% compared to the year ago period, whereas the broader S&P 500 is expected to grow earnings 7.2%. This 11.8% EPS growth outperformance for tech, if achieved, would represent an acceleration from last quarter’s 9.6% outperformance. That would mark the largest outperformance for the sector relative to the broader market since the first quarter of 2024. As shown in the chart below, tech has not seen this type of sustained EPS growth outperformance since 2023.
Investors aren’t waiting for confirmation of this fundamental outperformance to buy tech over the broader marker. XLK outperformed SPY by a strong 3.5% during the calendar third quarter according to FactSet data, reflecting investor optimism about the sector’s potential. As shown below, this outperformance brings the XLK-to-SPY price ratio to fresh highs. Said differently, tech stocks relative to the broader market are the most loved they’ve been in recent history.
The chart also shows an important relationship between earnings outperformance and relative price outperformance – price performance of XLK to SPY often reflects relative earnings growth performance in advance. Tech’s strong run in 2023, which saw repeated new highs in this ratio, was underpinned by robust fundamentals. With tech earnings growth expected to outpace the broader market’s earnings growth for the rest of the year, active investors may want to consider where this chart could be heading next.
Tech executives are rapidly making deals in order to bring new products to market quickly and power future earnings growth. As my colleague Sonu Varghese, Vice President, Global Macro Strategist, wrote about this week, deal activity amongst and investments in AI-focused tech companies keep on rolling. I’ve reposted a chart below of some of the most recent deals, which serves to highlight the magnitude and pace of deal announcements in the tech space. Investors may very well want to hear from executives during this earnings season how these deals smooth relationships and help deliver robust growth.
Investors will be looking for strong tech earnings this reporting season. The tech sector ETF has hit new highs and has materially outperformed the broader market. Outsized EPS growth for the sector is expected to continue through the end of the year and places a high bar on the companies to deliver. The pace of dealmaking within the space has felt torrid and is reflective of the companies’ efforts to live up to these expectations.
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