It’s no secret the last 12 months have resulted in healthy gains for stocks. From December 31, 2018 through Friday’s close, the S&P 500, including dividends, returned more than 31%. The rally has been broad, too. Excluding Energy, which makes up a mere 4.3% of the index today, no sector returned less than 18% over the period.

For those intent on outperforming the index though, 2019 may well have presented a challenge. Of the 11 sectors, only one outperformed the S&P 500. Check out the performance derby – S&P in black – since the end of last year.

Sector Derby.PNGInformation Technology has been a dominant force, to say the least. The group led during the first half of the year, then almost single-handedly dragged the entire index higher over the second. Thus, after a major decline in the fourth quarter of 2018 that ended on Christmas Eve, the S&P 500’s largest sector (almost 1/4 of the index) has returned nearly 60%.

If you’ve only been watching EPS metrics, Tech’s outperformance likely seems odd. Their earnings growth was virtually flat for 2019 – slightly less than the S&P 500 overall. And even though earnings growth is expected to rebound in 2020, Tech is seen as an underperformer once again.

2020 EPS Growth by Sector.PNG

If you’re looking for fundamental justification, the Friday publication of FactSet’s Earnings Insight provides some explanation. Twenty tech companies have issued positive guidance for the fourth quarter. In the last 4 years, only the first quarter of 2018 had more – a quarter set apart by a significant cut to the corporate tax rate.

Tech Positive Preannouncements.PNG

Perhaps this renewed macroeconomic confidence will turn into positive earnings revisions for the remainder of 2020 and offset the multiple expansion we’ve witnessed over the last year.

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