Detect, Don’t de-Tech

How to navigate tech amid market volatility.


Gargi Pal Chaudhuri Jan 28, 2022

U.S. equity markets had a tumultuous start in January. Amid the market volatility, growth-oriented technology companies came under extreme selling pressure, falling into correction territory — defined as a 10% drop — after weeks of decline across major equity indexes. Expectations of the Fed raising interest rates weighed on tech stocks, with a rapid rise in real yields (i.e. the yield after inflation), while potential new anti-trust regulations caused uneasiness.1

DETECT, DON’T DE-TECH

Differentiation is key, and recent volatility underscores the importance of detecting quality exposures within the category. Many pandemic winners, like Peloton, Zoom, and Netflix, already gave back most of their post-pandemic rally as investors expect the COVID-related growth tailwinds to fade from here.2 Meanwhile, quality, innovative tech companies with stable cashflows and higher profit margins, have fared relatively well. We think it is important to winnow the winners and keep exposures to quality tech companies, such as those in the data processing, hardware, and semiconductor industries, while being cautious with high growth companies that are not yet profitable.

Not all tech companies are created equal

Chart showing profit margins across different tech sectors

Source: BlackRock, Aladdin, Bloomberg, performance and trailing 12 month profit margin based on GICS Industry classification for S&P 500 companies, as of 1/24/2022. Past performance is not indicative of future results.


TECH IS THE FABRIC UPON WHICH TODAY’S ECONOMY IS BUILT

The long-term value proposition of tech stocks remains the same. Secular growth trends like reliance on data analytics and digitalization of industries requiring ever-growing amounts of chips are multi-year transformations that we expect to persist. Despite the recent selloffs in stay-at-home favorites, COVID-19 has accelerated the adoption for business virtualization and communications software. A McKinsey survey conducted in 2020 suggests that 75% of people who used digital channels for the first time during the pandemic plan on continuing to leverage these digital options going forward.3

Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Kristy Akullian, CFA

Investment Strategist

Contributor

Jasmine Fan, CFA

Investment Strategist

Contributor