If you’re confused by the latest cacophony about tariffs, trade wars and regulatory scrutiny – as well as their perceived impact on the U.S. information technology sector – you’re not alone.

Indeed, filtering the political “noise” from the underlying economic “signal” is a challenge even for the most seasoned investment professionals.

However, the process of identifying and focusing on the long-term, fundamental drivers of a given theme, idea or market segment can help us look past the short-term volatility, and ultimately increase our chances of investment success.

For technology stocks in particular, we’ve identified four key supports which we believe investors should remain focused on through the current environment:

1. Strong, Synchronized Global Growth

The tech sector is a highly pro-cyclical segment of the U.S. equity market, so one of its first hurdles is the global business cycle.

Fundamentally, U.S. tech sales depend on world-wide demand, which is good given the steady pickup in global growth since early 2016.

2. Higher Exposure to Faster International Growth

The S&P 500 Information Technology sector requires improving economic prospects on a planetary scale because of its high degree of foreign exposure.

57.2% of total tech sales came from outside of the U.S. in 2016, meaning that IT companies rely on foreigners for over half of their global sales.

In our view, some of the most exciting growth stories are developing beyond U.S. borders, as all cylinders of the global growth engine are firing at once.

3. U.S. Dollar Weakness

High foreign exposure is the fundamental link between currency dynamics and the tech sector.

There has been an inverse relationship between the U.S. dollar and tech sales over time, meaning that currency weakness boosts the sector’s top-line growth.

U.S. dollar depreciation benefits large, multi-national IT corporations through foreign sales/exports, demand creation, positive translation effects and increased competitiveness.

4. Accelerating Sales Growth

For all of these reasons, Information Technology sales growth is up 15% year-over-year compared to S&P 500 sales growth of 9% year-over-year.

That’s a 6% growth spread in favor of the tech sector, which is second only to the energy sector on the same basis.

The Bottom Line

Despite all the concerns about tariffs, trade wars and regulatory scrutiny, some observers may be puzzled by the fact that U.S. tech stocks remain consistent outperformers.

Specifically, the S&P 500 Information Technology sector is up 3% year to date while the S&P 500 is down 1% in the same time frame.1

Since the U.S. stock market peak on January 26, 2018, Tech is down just 5% while the S&P 500 is down 8%, meaning the sector is outperforming by 3%.

In our view, strong global demand, high foreign exposure, U.S. dollar weakness and quickening sales growth are stiff fundamental tailwinds behind the S&P 500 Information Technology sector, and the main reasons why we expect it to continue outperforming.

 
  1. ^Source: Bloomberg, price returns, 4/4/18.