- Tech stocks are uniquely positioned to profit from a continued rally in US stocks and defend against a market downturn, according to equity strategists at Credit Suisse.
- They recommended an "overweight" on the sector, even as other strategists question whether tech's leadership of this bull market is over.
Count the equity strategists at Credit Suisse among the cohort of Wall Streeters who have lost faith in tech stocks.
The sector - which includes companies ranging from software providers to chipmakers - has enjoyed an unparalleled run during this record-breaking bull market. But that also means they've acquired rich valuations along the way, leading many investors to draw parallels to the dotcom bubble and, at the very least, question whether their market leadership can continue.
Andrew Garthwaite, the global equity strategist at Credit Suisse, is taking the other side of that viewpoint. And his bullish view applies not only to the sector, but to the stock market at large.
To be sure, Garthwaite lowered his overall rating on stocks to "benchmark" from "overweight," citing the slump in positive earnings surprises and the trade war. Still, he envisions a 2% gain for the MSCI All-Country World Index through the end of the year, and an extension of the bull market in the US.
Specific to the US, Garthwaite said in a client note that the Federal Reserve's policy U-turn could serve as a theme that propels stocks even when earnings are disappointing.
"Late-stage bull markets often see a theme move to a valuation extreme, and can frequently end up with much higher multiples (as we saw in Japan, the Nifty 50 or the TMT bubble, when multiples hit 45x to 60x)," Garthwaite said.
He's also bullish because he says stock buybacks - which have contributed to 20% of earnings-per-share growth since 2012 - can continue to drive returns going forward.
Should this broader rally in stocks continue, Garthwaite sees the tech sector as uniquely positioned to reap its gains. But even if the rally falters, he says tech is attractive as a defensive sector.
In other words, it's hard to go wrong with an "overweight" in tech - a positioning he recommends to clients.
Garthwaite cited four main reasons why tech stocks are attractive as a defensive play for a market slump.
First, he cites the sector's net-cash position relative to other sectors. A separate analysis published by Evercore ISI in January found that the top-ten tech companies had a combined $350 billion in net cash on their balance sheets, and were expected to generate another $600 billion in free cash flow through 2020.
Although much of that cash will likely be spent on dividends and buybacks - the latter of which would actually boost earnings per share - it represents dry powder that's available to keep these companies afloat in a market downturn.
The second factor working in tech's favor is that it has low labor costs relative to market cap. That's beneficial in an environment where wages are rising and biting into margins.
Garthwaite's third rationale for tech stocks as a defensive shelter is that the sector's sheer size makes the success of companies like Amazon and Alphabet hard to recreate, and provides barriers to entry. That's a contrast to the hordes of companies that helped create the dotcom bubble.
His fourth and final reason is that tech is cyclically well positioned because its share of gross domestic product net of depreciation is still low. This implies that there's room for the sector to boost its contribution to investment as the economy keeps growing.
The US software companies that Credit Suisse's equity analysts rate "overweight" include Adobe, Autodesk, Microsoft, Oracle, and Salesforce.com.