US technology shares faced one of their worst weeks of 2016 as investors shifted their focus to equities that will benefit from the soaring price of oil and the policies of the Trump administration.
The S&P 500 technology index, a measure of large companies in the sector, has declined 3 per cent since Friday last week. The fall represents the steepest drop since late April, when Apple shares tumbled 11.3 per cent after the world’s biggest tech group disclosed its first decline in revenues in more than a decade.
“Big tech is getting hit by another round of profit-taking where people are taking money out of high-value momentum names to fund going after value plays in other sectors,” said Colin Cieszynski, chief market analyst at CMC Markets.
The selling in technology shares this week comes as investors cash in on gains from earlier this year. The sector was up 11 per cent for 2016 at the end of October, a year-to-date gain that has since receded to 7.8 per cent.
The fall has pulled the tech-heavy Nasdaq Composite, which on Thursday suffered its biggest fall in a month and a half, down by 2.5 per cent from its all-time closing high on Friday last week. The broader S&P 500 is down by a slimmer 0.8 per cent from its record high on the same day.
In contrast to the declines for technology, both energy and financial shares have been in vogue this week, extending a trend in place since the US election on November 8.
A deal by members of Opec to reduce production for the first time since the oil collapse two-and-a-half years ago helped the energy sector’s allure, sending it up 3.1 per cent this week. It is up 7.6 per cent since election day as traders have cheered the rising oil price and expectations that president-elect Donald Trump and a Republican Congress will loosen regulations.
Financials have also been a beneficiary of Mr Trump’s surprise election victory as speculation that his plans to cut taxes and ramp up infrastructure spending will stoke higher levels of inflation and economic growth have sent bond yields surging. Higher yields are seen as bullish for the profits of companies in that sector.
The nomination this week of Steven Mnuchin and Wilbur Ross, both finance industry veterans, for positions in Mr Trump’s cabinet has also boosted hopes that he will push to soften regulation on the industry.
The higher-rate environment that has provided a tailwind for financials has had the opposite effect on tech shares, noted Nicholas Colas, chief market strategist at Convergex. That is because stocks with higher valuations tend to struggle more in environments where rates are rising, he said.
The technology sector sports a forward 12-month price-to-earnings ratio of 16.2 times, compared with 13.6 times for financials, according to S&P Global data.
“It is rates,” Mr Colas said. “With rising rates, higher p/e stocks tend not to do as well because of math, really.”