CIO Insights: Beyond tech – where other opportunities lie in US equities

23 February 2024
Stephanie Leung
Group CIO

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The US stock market has remained buoyant into the start of 2024, with much of its performance continuing to come from the technology sector.

But given uncertainty over the direction of the economy and with valuations stretched, the big question for equity investors is: how should we think about investing in tech at this juncture? And do any other sectors have the potential to outperform the broader stock market in the months ahead?

In this month’s CIO Insights, we explore both the opportunities and the risks in US equities.

Key takeaways:

  • The technology sector has significantly outperformed the broader market over the past 13 months or so – with total returns of 68% versus 32% for the S&P 500 since the start of 2023. The sector should continue to enjoy promising growth prospects over the longer-term, but the near-term picture appears less attractive due to pricey valuations and crowded positioning in the sector.
  • Looking to other US equity sectors, healthcare stands out as an attractive area of the market. Our analysis points to potential upside from the combination of strong earnings potential, reasonable valuations and less extreme investor positioning. 
  • Among less-loved sectors, energy stands out due to its cheap valuations and low earnings expectations. But given the highly cyclical nature of the sector’s earnings, the potential for unexpected strength in the economy and/or an uptick in geopolitical tensions suggest more upside versus downside risk on balance. 
  • Looking through the lens of our Economic Regime Asset Allocation (ERAA®) investment framework, equity sector performance can differ widely depending on shifts in markets and the broader macroeconomic environment. Our General Investing portfolios are well-positioned to help you benefit from these shifts – with an overweight allocation to the healthcare sector, a small overweight to energy, and a market-weight allocation to tech.

Technology: Long-term promise amid near-term concerns

To evaluate US equities, consider these three key pillars – fundamentals, valuations, and positioning:

  • Fundamentals refer to a company or sector’s financial performance and health, including its historical returns and future growth prospects.
  • Valuations involve assessing whether a sector is cheap or expensive relative to its own history, as well as compared with other sectors.
  • Finally, positioning helps us gauge the sentiment of other investors.

In general, tech and related sectors, like communication services, appear to have strong fundamentals, with high (but not excessive) earnings potential in the year ahead.

As shown in the chart below, these sectors have historically enjoyed robust earnings per share (EPS) growth. The information technology sector – think Apple, Microsoft, and Nvidia – has seen a compound annual growth rate (CAGR) of 16% between 2007 and 2022. Meanwhile, the communication services sector – think Alphabet and Meta – has posted EPS growth of almost 8%.

Both sectors posted EPS growth above the 6.6% for the broader S&P 500 during that period. In addition, the volatility of those earnings has been relatively stable compared with other sectors. 

Why is that the case? Over the past few decades, these companies have been the beneficiaries of the rapid expansion and adoption of digital technology and the internet. And the biggest companies have come to enjoy high profit margins due to the scalable nature of their business models and the strong pricing power they’ve been able to attain.

What’s more, with increasing adoption of AI, these tech giants are likely to continue to benefit over the longer-term. (For more on that, see our CIO Insights: Getting smart about AI as a long-term investor.)

That said, the picture shifts when you consider more near-term metrics like valuations and investor positioning. Looking at valuations for tech stocks, which represent the market's forward-looking assessment of its earning potential, these companies look expensive. The tech sector’s forward price-to-earnings (P/E) ratio stands at 36.5x – well above the 15-year average of 21.2x. For communication services, the gap is a bit more reasonable at 18.6x versus 17.2x. 

Finally, data on positioning show that many investors are heavily invested in the sector, as illustrated in the chart below. Based on the results of Bank of America’s (BofA) latest Global Fund Manager Survey, investors remain extremely bullish on the sector, with allocations into tech stocks hitting the highest level since August 2020. In general, the more concentrated or “crowded” the trade is, the riskier it can be.

Our conclusion: The technology sector remains a solid longer-term investment. But given that valuations are stretched and positioning is crowded, it’s possible that we may see a healthy correction over the next few months.

ERAA®'s allocations to the sector are currently market-weight, down from its overweight positioning during our last re-optimisation. This is due to the increase in the tech sector’s market capitalisation over the past 13 months, which has meant its weighting in benchmark indexes has caught up with ERAA®’s allocation.

Healthcare: Attractive growth at a reasonable price 

The healthcare sector appears attractive as it has tended to outperform the broader S&P 500, has had more stable growth, and is reasonably valued. 

Like tech, its earnings growth of 8.2% per annum between 2007 and 2022, has been higher than that of the broader index. But, unlike tech, that growth has been among the least volatile across all sectors.

Healthcare is also expected to post a turnaround in 2024 after underperformance in 2023 – when the sector faced a rare decline in earnings tied to high base effects from the pandemic.

As illustrated in the chart below, EPS growth is projected to come in above both the broader market and its own historical performance. While this is probably due in part to favourable base effects, these expectations have likely also been driven by innovations in the healthcare industry – for example, new treatments like weight loss drugs.

The sector’s valuations are also reasonable, with a forward P/E ratio of 19.3x. That’s above its longer-term average of 16.6x, but well below that of tech and the broader S&P 500, at 24.2x. 

And from a positioning perspective, while the BofA Fund Manager Survey also shows that its respondents are overweight on the healthcare sector, they’re much less so versus tech.

Our conclusion: Healthcare could be an attractive sector to focus on, as reasonable valuations, new product innovations, and longer-term demographic trends all point to a normalisation in the sector’s returns in the period ahead. The sector’s defensive nature also means it could provide downside protection to a diversified portfolio.

ERAA® is currently overweight on the sector. (And if you’re interested in gaining more targeted exposure to the healthcare sector, check out our Healthcare Innovation thematic portfolio.)

Energy: A potential wild card

From the data, we also see a potential wild card in the energy sector. As we shared in part 1 of our H1 2024 outlook, a mixture of heightened geopolitical risk and tight oil supply could pose upside risk for oil – which would benefit energy companies. That said, a slowing global economy also weighs against that.

Likely due to the latter, earnings growth expectations for the energy sector are currently muted, at about -7% this year. However, historical earnings volatility is also significantly higher than other sectors (as shown earlier in Chart 1), which could mean potential for upside – as well as downside – surprises.

In addition, valuation metrics suggest that the energy sector is relatively cheap compared to its equity returns, as seen in the chart below. Its price-to-book (P/B) ratio of 2.2x, for example, is consistent with sectors that have about 40% to 50% of its return on equity (ROE). Its P/E ratio paints a similar picture. Finally, investor positioning, as illustrated by the BofA Fund Manager Survey, is very low, with a net underweight to the sector.

Our conclusion: Energy stocks appear undervalued relative to their equity returns, which could present an opportunity should heightened geopolitical risk result in an uptick in oil prices. ERAA® has a small overweight on the sector given its ability to protect against sticky inflation.

Shifts in the economic regime can result in shifts in equity returns

Finally, looking through the lens of our investment framework, ERAA®, it’s also important to understand that sector returns can vary depending on the economic environment.

For example, as the heatmap below illustrates, the technology sector has performed strongly on both an absolute and risk-adjusted basis in the current stagflationary regime. However, other sectors can perform just as well or even better in other regimes.

Given current market and macro dynamics, our General Investing portfolios are well-positioned, as described above. And should ERAA® signal a shift in the months ahead – whether to recession or to ‘good times’ – our investment framework will adjust your portfolios’ allocations accordingly.

Finally, we should emphasise that while it’s important to understand how markets can shift in the nearer-term, the key to building wealth lies in sticking to a strategy that lasts.

By staying invested with a long-term strategy that’s appropriate to your risk appetite, you’ll be positioning yourself to take advantage of opportunities as they come. In the end, what’s most important is time in the market, not timing the market.

Glossary of Terms

Base effect:

The impact of comparing current data to a particularly low or high base number. For example, if prices were unusually low last year, comparing prices now will show significant inflation.

Risk-adjusted return:

Measuring an investment's return to account for the volatility of that return. If two assets have similar returns, but one involves less risk, that asset has a better risk-adjusted return.


Holding proportionally more (overweight) or less (underweight) of an asset in a portfolio, as compared to the wider market or a particular benchmark.

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