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Quarter-End Insights

Tech and Telecom Sectors: Time to Be Selective

Given the tech sector's higher recent volatility and overvaluation, we're seeking wider margins of safety and established economic moats.

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  • Foreign exchange headwinds obscure the 2015 outlook for some large tech firms; we still view the sector as overvalued, and we'd be selective.
  • Advertising on social, mobile, and video platforms will continue to drive the highest revenue growth as the overall online advertising market begins to slow. Consolidation, regulatory policy, and technology themes continue to converge in the U.S. telecom industry. 
  • The telecom market overseas is still consolidating, but European activity in particular may slow following the appointment of its new antitrust chief.

Despite flat stock returns for the S&P 500 through the first quarter, it hasn't been a particularly smooth ride for investors. The technology sector as a whole has lagged the market but there were notable areas of strength and weakness, often hinging on a firm's quarterly execution and management's initial 2015 outlook. The drop in oil prices and global currency movements over the past two quarters have resulted in slightly elevated volatility levels across both the technology and communication services sectors, and today we remain selective. In aggregate, we view the tech sector as slightly overvalued. 

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Peter Wahlstrom has a position in the following securities mentioned above: AAPL. Find out about Morningstar’s editorial policies.