Tags: Tech | Performance | S&P 500 | Sectors | Invest

Apple Surge Helps Tech Lead Performance Derby Among S&P 500 Sectors

Apple Surge Helps Tech Lead Performance Derby Among S&P 500 Sectors
(AP/Philip Toscano)

By    |   Thursday, 16 March 2017 08:41 AM EDT

Sector Focus I: What’s Hot & What’s Not.

Never doubt that an apple a day is good for you. Investors betting that an iPhone upgrade cycle will boost Apple’s bottom line have sent its stock climbing 20.0% ytd through Tuesday’s close. Its strong start to the year has helped the Tech sector gain 10.9% ytd, making it the top-performing sector of the 11 S&P 500 sectors. The Tech sector is trouncing the 5.7% return of the S&P 500, while the worst-performing sector of the index is Energy, with a 9.0% decline ytd.

Apple accounts for about a third of the Tech sector’s ytd gain, Joe calculates. Without Apple, the Tech sector’s ytd return would be 7.5%, still besting the S&P 500. The company has also helped the Technology Hardware, Storage & Peripherals industry increase 18.3% ytd. Other industries boosting the Tech sector include Home Entertainment Software, which is the top-performing S&P 500 industry ytd with a 25.9% gain, Semiconductor Equipment (17.7%), and Application Software (16.8), which are in sixth and eighth places among the 100-plus industries we monitor (Fig. 1 and Table).

Here’s the performance derby for the S&P 500 sectors ytd through Tuesday: Tech (10.9%), Health Care (9.4), Consumer Discretionary (6.7), Financials (6.2), Consumer Staples (5.9), S&P 500 (5.7), Utilities (4.3), Materials (4.0), Industrials (3.7), Real Estate (-0.6), Telecom Services (-4.0), and Energy (-9.0) (Fig. 2).

Let’s take a look at what’s driving performance in some of the other sectors before returning to Tech:

(1) Drugs on a high. The market-beating performance of Health Care (9.4%) is admirable given the uncertainty about the potential repeal and replacement (R&R) of Obamacare and the hostile tweets about drug pricing from President Trump. Indeed, Pharma, Biotech, and Managed Care are up 7.6%, 9.1%, 8.5% ytd, respectively (Fig. 3).

(2) Houses beating malls. Likewise, the Consumer Discretionary sector has overcome the terrible performance of Department Stores (-14.5%), General Merchandise Stores (-14.0), and Apparel, Accessories & Luxury goods (-6.3). The sector’s above-average performance ytd is thanks to Homebuilding (21.7), Casinos & Gaming (21.0), Tires & Rubber (17.9), and Auto Parts & Equipment (16.9), which were the second, third, fifth, and seventh best-performing of the industries we track in the S&P 500 (Fig. 4 and Fig. 5).

(3) Rising rates bifurcating returns. The specter of higher interest rates may be broadening to affect industries beyond the obvious Financials industries, which benefit from a steeping yield curve. For example, the Materials sector is underperforming despite the recent string of solid economic reports. Among its worst-performing industries are Copper (-7.0%), Construction Materials (-5.2), and Gold (-4.9). The price of gold is inversely correlated with the 10-year TIPS yield, which has been moving higher recently (Fig. 6). In addition, commodity-related industries may be pricing in a strengthening US dollar in anticipation of further interest-rate increases by the Fed (Fig. 7). Conversely, the potential for higher rates has helped Financials, as we’ve expected, with Diversified Banks (7.6) and Investment Banking & Brokerage (6.2) leading the way (Fig. 8).

Higher interest rates undoubtedly are weighing on returns in the Real Estate and Telecom Services sectors. However, rates have had less of an impact on the Consumer Staples sector, which includes many stocks that pay a nice dividend and were being used by investors as bond alternatives. The sector has performed well thanks to M&A activity. Kraft Heinz announced and withdrew a $143 billion offer for Unilever PLC in February, leaving investors in other companies in the sector hoping that Kraft would satiate its hunger for acquisitions by buying a US consumer goods company. It was also revealed that shareholder activist Trian Fund Management had invested more than $3 billion in Procter & Gamble. The news lit a fire under Household Products (10.4%) and Personal Products (8.3) (Fig. 9).

(4) Transports heading in different directions. One area to keep an eye on: Transports. It’s odd that they’re trailing the market, having risen only 1.7% ytd, even though lower oil prices should be acting as a tailwind. Declining have been Airlines (-3.4% ytd), Air Freight & Logistics (-1.9), and Trucking (-1.8). Only Railroads continues to chug along, having climbed 9.3% ytd (Fig. 10).

Sector Focus II: Technology’s Amazing Race.

President Donald Trump met with the automakers in Detroit yesterday, the same day the EPA reopened a review of tougher emissions targets and fuel mileage requirements established at the end of the Obama administration. One industry estimate put the cost of meeting those standards at $200 billion. So lowering the bar would be a nice carrot to throw the auto industry while the administration continues to consider taxing Mexican imports, including low-priced vehicles made over there by American automakers.

Meanwhile, auto manufacturers and suppliers are investing in developing autonomous cars. They know the competition is heating up as the titans of Silicon Valley are throwing tons of money at the area. Earlier this week, Intel was the latest to put the pedal to the metal with its $15.3 billion acquisition of Mobileye NV, the Israeli company that makes cameras used to guide autonomous cars, and warn you when you are about to change lanes into another vehicle. The deal follows Qualcomm’s $39 billion deal to buy NXP Semiconductors, which makes chips to handle functions like braking and fuel injection, and Samsung Electronics’ $8 billion acquisition of Harman International Industries, which makes sound systems for cars.

At the same time, auto manufacturers are making their own acquisitions to stay in the race. GM paid $1 billion for Cruise Automation, Uber bought Ottomotto for $680 billion, and Ford spent $1 billion for a majority stake in Argo AI. That’s in addition to the money being spent by new industry upstarts like Tesla and Waymo (the Google unit) on developing the technology.

The raft of deals did get us thinking, however, about the economics of car-making. Auto manufacturing is a highly competitive, cyclical business. Although it’s enjoying good times today, history is littered with the bankruptcies of automakers that have not successfully navigated downturns. It was only eight years ago that General Motors filed for Chapter 11 bankruptcy protection.

Analysts estimate that Auto Manufacturers will have relatively low forward profit margins of 5.1%, and a decline over the next 12 months in both revenues (-0.4%) and earnings (-2.2) (Fig. 11). The Auto Parts and Equipment industry is slightly more attractive. Analysts forecast a forward profit margin of 9.8%, with revenue and earnings growth rates of 1.5% and 5.4%, respectively. Investors have bestowed below-market multiples on both industries: a 6.8 forward P/E on the Auto Manufacturers and an 11.6 multiple on the Auto Parts industry.

Compare that to the Semiconductors industry, which is also cyclical. Analysts expect the Semiconductor industry to produce 6.2% revenue growth, 10.9% earnings growth, and a forward profit margin of 24.8%. Those more attractive economics have earned the industry a forward P/E of 14.9. The economics at companies like Google and Apple are even more attractive.

Will adding self-driving capabilities make the auto industry’s economics more attractive and tech-like? Our guess is no. The pricing for autonomous capability is coming down rapidly, and the feature will become expected by drivers over time, just as navigation is today and a sunroof was 20 years ago.

Alphabet’s Waymo division has reduced the cost of lidar (the lasers that help cars “see”) by 90% to roughly $7,500 from $75,000 a few years ago. Tesla Motors plans to charge buyers $8,000 to activate the autonomous driving technology in its newest cars. That price tag does not include the equipment needed for an autonomous car, which is put into all Tesla cars today, before the buyer indicates an intention to activate the software or not. The equipment consists of eight cameras, radar, ultrasonic sensors, and a supercomputer, according to a 10/20 article on electrek.co.

The price of autonomous driving systems must continue to come down if mass adoption is the goal. The $8,000 price tag might not be a stretch for consumers who can afford Tesla’s high-end models starting at $66,000. However, the $8,000 may be a tougher swallow for the customer buying Tesla’s low-end $35,000 model, especially since the company doesn’t yet have regulatory approval to let its cars drive autonomously. Tesla suggests owners can pay for the cost of the software by having their cars join the Tesla Network, a fleet of ride-sharing cars that will compete with Uber and Lyft. More details on the project are expected this year.

The US consumer already seems to be stretching to buy a car. Motor vehicle loans have risen 59% since the recent low during Q3-2010 to an all-time high of $1.1 trillion at the end of last year (Fig. 12). The average maturity of new car loans has increased from 59.5 months in March 2009 to 66.5 months in December 2016, according to data from the St. Louis Federal Reserve. And car loans delinquent by 30 days or more grew to $23.3 billion, the most since $23.5 billion in Q3-2008, during the recession, according to data from the New York Fed.

It’s clear why Intel would want to expand into the auto industry. Its core PC business is in decline. “Intel, which faces a raft of challenges in its core business of powering the personal-computer industry, estimates the market for autonomous-driving systems, services and data will reach $70 billion by 2030. That includes navigation, in-car communications and advertising—and keeping a car’s perception and decision-making capabilities finely tuned to avoid mishaps as road conditions change,” noted a 3/13 WSJ article.

No doubt the revenues involved will be large if these systems achieve mass adoption. The tougher question is whether profit margins on these new products will look like tech industry margins or auto industry margins? The answer may determine whether shareholders will be happy about tech companies’ diversification efforts.

Certainly, the CIA should be pleased about the advancements in car technology. Stephen Soukup and Mark Melcher, our friends at The Political Forum, recently noted that documents disclosed by WikiLeaks revealed that the CIA can use most web-connected devices to further its spying ambitions. It can tap into TVs, computers … and cars. The CIA supposedly has the ability to know where your car is headed, and it may be able to control the vehicle and cause it to crash. Driving with a roadmap and listening to a push-button AM/FM radio might be a safer way to travel.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

© 2025 Newsmax Finance. All rights reserved.


EdwardYardeni
Apple's strong start to the year has helped the Tech sector gain 10.9% ytd, making it the top-performing sector of the 11 S&P 500 sectors.
Tech, Performance, S&P 500, Sectors, Invest
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2017-41-16
Thursday, 16 March 2017 08:41 AM
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