The Technology Sector Looks Very Expensive: Barclays By Investing.com

In a note on Thursday, Barclays analysts cautioned that the technology sector appears very expensive despite another quarter of higher-than-average earnings surprises.

They noted that they had an EPS surprise of +7.8%, well above the pre-pandemic average of 5.24%, with 80% of companies beating consensus estimates, a significant improvement over historical averages.

“Once again, the S&P 500 delivered a better-than-average EPS surprise…reaching +7.8%, well above the 7-year pre-pandemic average of 5.24%,” the bank wrote.

Tech remains the leader, leading with a hit-to-miss ratio of almost 90%, followed by Healthcare and Consumer Staples. However, results were not uniform across sectors, and estimates were often missing for energy, utilities and materials.

Additionally, Big Tech played a key role in the overall margin recovery of the S&P 500 Index, generating positive operating leverage for the third consecutive quarter.

Barclays said: “Big Tech remains key to the S&P 500 margin recovery story.”

Additionally, Barclays explains that while the fourth quarter of 2023 saw mixed results for Big Tech – with strong year-over-year EPS growth offset by lower-than-average EPS numbers – the first quarter of 2024 reversed that trend. Although year-over-year growth slowed from +63% in Q4 2023 to +56% in Q1 2024, average EPS rebounded, especially thanks to NVDA and GOOGL.

Despite strong financial results, Barclays highlights that most sectors, especially technology, are trading at or above full valuations.

“The entire technology sector looks very expensive compared to long-term and pre-pandemic valuations,” Barclays stressed. However, “Big Tech is trading at a much lower premium thanks to very strong growth in implied earnings.”