October Update - Tech stocks continue to drive markets

Apple and Microsoft investors aren’t the only ones smiling, as the US market rides the coat-tails of its leading tech giants

A key theme we’ve seen this year is the strength of the US tech sector. Rallying 36% year-to-date, tech stocks account for almost a third of the 22% rise in the S&P 500. The sector has been at the heart of a series of all-time market highs, with few signs this trend is about to fade.

During October this theme continued to unfold, in no small part because of the upbeat quarterly results posted by the sector’s heavyweight names, and as we inch closer to a US-China trade deal. Despite macroeconomic headwinds, tech companies still have the potential to deliver strong earnings growth. This is central to our preference towards this sector.

Apple (APPL) is leading the way, shrugging off concerns relating to competition, trade tariffs and demand for the iPhone 11. Instead, it delivered revenue growth, earnings well above forecast, and upgraded its guidance for the December quarter.

While Apple shares climbed 11.1% last month – and are up 63.2% year-to-date – the outlook remains strong. Service revenue and iPad sales are growing at a double-digit rate, while the wearables division is surging. Meanwhile, issues in China appear to be subsiding, and the company has growth set to come online via next-gen 5G products and Apple TV+.

The market’s second-largest stock, Microsoft (MSFT), also delivered a beat on earnings and revenue, rising 3.1% across the month. Growth across the board remains particularly strong, and while headline numbers for the ‘Azure’ cloud business are moderating, that is because it continues to grow from an ever-increasing base.

Beyond direct-to-consumer hardware and software stocks, the markets are also getting a lift from chip makers. Look no further than Intel (INTC), which topped forecasts on every level and surged 9.7%. The company is seeing a return to revenue growth, buoyed by cloud data centre sales and demand that the company had admitted it cannot keep up with. There is further upside yet once execution is bedded down.

Similarly, Advanced Micro Devices (AMD) leapt 17% higher across October. The company’s results reinforced the strength of the sector. Its new-release processor chips recorded significant growth, helping the business post its highest quarterly sales in over a decade, and highest quarterly gross margin since 2012.

For now, even the implication of tariffs have done little to stunt the growth of big tech. That is not to say all tech stocks are in favour. However, we are seeing a clear divergence supporting fundamentally sound tech stocks with revenue and earnings growth – those driving this ongoing bull market.

Provided there is no escalation in the US-China trade war, this growth story is likely to continue. Should we have a favourable outcome, there may yet be a further rally buoyed by the inherent strength of the tech sector.

Presenting a new investment opportunity

I’d like to briefly take this moment to draw your attention to our new ASX-focused investment portfolio, the Australian Yield Portfolio, detailed further in this letter. It’s great to be able to launch this service to investors seeking a sustainable source of income, once again free from brokerage fees.

As always, thank you for your support. If you have any questions, please contact me below.

Michael Smith,

Senior Investment Advisor