Macro Wrap – Technology the Ugly Stepchild, $XLK

by Enis July 22, 2013 8:13 am • Commentary

The technology sector continues to be ugly stepchild of this roaring bull fun in 2013.  MSFT’s 11% drop on Friday hurt large cap tech, but the SPX index closed higher, increasing the gap between the performance of the technology sector and the S&P 500 index to its widest in 2013.

The technology sector ETF, XLK, is still up an admirable 9% this year, but that’s less than half the performance of the S&P 500.  The real shift occurred last fall though – here is the chart of the XLK / SPY ratio over the past 5 years:

Ratio of XLK / SPY over last 5 years, Courtesy of Bloomberg
Ratio of XLK / SPY over last 5 years, Courtesy of Bloomberg

It hit a 4 year low on Friday, but it actually peaked back in 2012.  Technology was a leader of this bull market until mid-2012.  Since then, it’s been a major laggard.

AAPL has obviously been a major drag, as it still makes up 13% of the XLK, and is down 20% on the year (and 40% from its 2012 high).  But other large cap names have struggled too.  Here is the year to date performance of the other mega-cap stocks in XLK:

  • IBM +1%
  • MSFT +17.5%
  • T +6.2%
  • GOOG +26.8%
  • INTC +11.7%
  • VZ +15.4%
  • ORCL -4.4%
  • QCOM -0.7%
  • CSCO +31.4%
  • AMZN +21.7%

Aside from GOOG, CSCO, and AMZN, the rest are all underperforming the S&P 500 index performance in 2013.

Two major themes stick out from this group:

  1. Smartphone saturation – that has weighed on AAPL, T, VZ, and QCOM, which were big beneficiaries of the smartphone boom between 2010 and 2012.  Other handset producers have struggled in recent months as well, including Samsung, which is down almost 20% in 2013.  
  2. International enterprise spending – IBM and ORCL (as well as ACN after its recent miss) have been weak since March.  CSCO has bucked this trend, though they’ve been shifting their business from hardware to software for a while now, and also had much lower expectations to start the year.

The internet stocks continue to be leaders, though recent results from EBAY and GOOG have slowed that momentum.

In contrast, earnings results from almost every other sector (with the possible exception of consumer staples) to start this earnings season have provided reasons to rally.  Financials, consumer discretionary, health care and industrials have all made new bull market highs.

This week, AAPL (Tuesday pm), T (Tuesday pm), EMC (Wednesday am), QCOM (Wednesday pm), FB (Wednesday pm), and AMZN (Thursday pm) will complete most of the large cap tech earnings season.  We’ll have a much better sense by the end of the week whether technology will finally be invited to the market’s ball.