- Friday followed a rather robust first week of earnings season with a sharply negative market.
- Much more important than drivers of day-to-day swings are fundamental drivers.
- Information Technology seems well poised fundamentally despite recent weakness in shares.
- Semiconductors are typically a leader early in economic cycles—and its fundamentals don't speak to an approaching double dip.
(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of a broader theme we wish to highlight.)
Friday closed the Q2's earnings season's first week with US bank giants Bank of America and Citigroup both reporting better-than-expected profits and lower loan loss provisions—and stocks sold off big.
The reason? Perhaps their lower-than-expected revenues combined with lower consumer sentiment played into fears of a double dip recession. But there are usually many reasons behind big down days like Friday—trying to piece together why exactly day-by-day volatility occurs isn't typically very fruitful. In the long run, what made today fall over 2% versus yesterday's slight increase isn't nearly as significant as weighing fundamental forces—both positive and negative. And those rarely change overnight.
The bank news Friday ran counter to reports earlier in the week from other sectors like Intel's record quarterly report of earnings and revenues, and AMD's report of a 40% revenue gain released Friday. Fundamentally, Information Technology (IT) has done very well of late—and appears well positioned to expand further.
The IT sector is showing the influence of several key drivers expected to push the global economy higher as a whole. While overall IT spending growth was recently revised lower to +3.9% for 2010, the fast-growing Emerging Markets countries we've discussed often are forecast to show 26% growth in laptop sales this year—primarily due to expanding domestic consumption (meaning the average João can now shop from the Amazon on Amazon.com). This force is expected to be a meaningful contributor to global PC sales surpassing their 2008 peak in 2010.
Increased demand for technology goods is further exemplified by strongly increasing exports from tech-rich Taiwan—which posted record exports to the US recently. This development signifies not only the sheer demand for tech goods, but also falling trade barriers and solid increases in global trade year-to-date. Recently signed free trade agreements between China and Taiwan further this existing trend, a clear positive for global trade.
Further, a recent Goldman Sachs survey of 100 IT executives showed significant pent-up demand for hardware as IT budgets have improved. Already up significantly in 2010, semiconductor revenue forecasts were recently upped to 42.3% for 2010 year-over-year. And despite a small increase in Q1, chipmaker inventories remain low—likely necessitating increased production in future quarters. Worldwide semiconductor capital equipment spending is forecast to grow a whopping 113% in 2010 as companies begin deploying large cash stockpiles to upgrade technology. In addition, other components remain in short supply—like liquid crystal displays (used in computer and TV screens, for example) and memory chips. Developments in the IT space—especially semiconductors—are strongly positive now and looking forward.
So what do chips tell us about the current market dip? Semiconductors tend to be early movers in an economic cycle. Therefore, positive fundamentals in chips should be speaking directly to double-dippers (as we all should at cocktail parties). Consistent with a correction, IT stocks fell by about -16% the last few months, while all of the above developments were taking shape. Semiconductors today are a microcosm of the current correction. Some slight negatives, like an estimated slower rate of overall IT spending growth. Powerful positives, like Emerging Markets demand growth, booming global trade, and business spending increases all should continue pushing demand higher—which should bode well for Technology but also more broadly economically sensitive sectors.
Sources: Gartner Research, Semiconductor Industry Association, iSupply, IDC