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US tech growth slips

US tech growth slips

The great US technology stock surge has reached a turning point, or - at the very least - suffered a slip. Last week, an abrupt end to the stunning share price growth experienced by some of the world's biggest corporations in the past few months dragged the S&P Technology index down 4 per cent, wiping off $140bn (£110bn) in market value. The rout continued on Monday 12 June when Apple (US:AAPL) and Netflix (US:NFLX) closed down 2.5 per cent and 4 per cent, respectively. The shares have since recovered some of the ground lost.

For some market watchers, this sudden drop was unsurprising. The surge in demand for shares in companies such as Google-owner Alphabet (US:GOOGL) and Amazon (US:AMZN) has left the sector with an extraordinarily high valuation of 19 times forward earnings. Both stocks breached $1,000 a share during the past two months. Tech is seen to provide strong revenue growth even in tough economic times, and with the Trump-inspired fiscal turnaround looking unlikely to materialise soon, many investors have flocked to the sector. So far in 2017, the S&P 500 tech index has been far and away the best-performing sector index, up 21 per cent before Friday.

With the Trump-inspired fiscal turnaround looking unlikely to materialise soon, many investors have flocked to the sector”

It is fair to suggest that some of these companies deserve their lofty ratings. Apple delivered a return on capital employed of 25 per cent in 2016 and sits on a $250bn cash pile, Alphabet's Google is widely considered the world's most valuable brand and Amazon's share price has climbed 340 per cent in the past five years.

But an excessive valuation makes a company vulnerable to a dip in sentiment. An increasingly gloomy global economic outlook, compounded by a bearish research note from Goldman Sachs released that week, may have sparked the sector downturn.

IC VIEW:

Apple is the only US tech stock we have a buy rating on and we are sticking with our advice. Some analysts think there is more air to be let out of the overinflated US tech balloon, but we remain positive about the long-term outlook for the sector.

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By Megan Boxall,
15 June 2017

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