Wall Street Beat: Tech stocks hold their own as markets surge
Sequestration will hurt IT spending, but tech sector growth will continue, industry insiders say
With U.S. markets rallying and the Dow Jones Industrial Average hitting record highs, analysts and industry insiders are expressing a sense of sober confidence, if not exuberance, about the tech sector's prospects for the year.
The Dow Tuesday hit a milestone, surging past its prior record high in 2007, achieved before the banking crisis and subsequent recession, and then ticked up again on Wednesday and Thursday. The Dow closed Thursday at 14,329.49, up 33.25 for the day.
The tech stocks included in the Dow are holding their own: Intel, Microsoft, IBM and Cisco shares all rose Thursday. Of the tech stocks in the Dow, only Hewlett-Packard shares declined. Meanwhile, the Nasdaq Computer Index, which includes Facebook, Google and Apple, rose Thursday as all major exchanges in the U.S. marked gains.
Some upbeat economic data this week has helped fuel the rise. Payroll processor ADP, for example, said Wednesday that U.S. companies added 198,000 jobs in February. The company also revised its January figure up by 23,000, reporting that businesses added 215,000 jobs during the month. The U.S. Federal Reserve on Wednesday reported in a survey that 10 of its 12 banking districts reported "moderate growth."
Behind the macro picture, the tech sector expects growth this year despite some economic bumps. One impediment to growth is the so-called "sequestration" in the U.S. -- US$85 billion in automatic, across-the-board spending cuts that kicked in last Friday, the result of a failure on the part of the political parties to reach a budget compromise.
The sequestration caused Andrew Bartels, chief economist at market research firm Forrester, to reduce his forecast for IT spending in the U.S. Forrester now forecasts that U.S. tech spending will increase in the 6 percent to 6.5 percent range, compared to the 7.5 percent growth it forecast before the sequestration set in.
Most economists have estimated that the sequestration will shave about half a percentage point from U.S. gross domestic product growth, previously projected to be a relatively weak 2 percent or so, Bartels noted. That decline affects tech spending because of the almost certain drop in purchases of IT goods and services by government agencies, but also because reduced federal spending flows through the economy and slows overall economic growth, Bartels noted.
This will also affect the global outlook for IT spending this year. "The U.S. accounts for about one-third of worldwide IT spending," Bartels explained.
But all is not lost. "We're still fairly optimistic but not as optimistic as before the sequestration," Bartels said.
The sentiment is borne out by other analysts and industry insiders. Total IT spending on hardware, software, and IT services will grow by 6 percent in 2013, to approximately $474 billion IDC said this week. In its forecast, IDC noted that the U.S. economy has been clouded with uncertainties surrounding the sequestration, contracting GDP growth and declining international trade due to recession in Europe. But IDC said it expects the U.S. economy to stabilize in the second half of 2013, leading to moderately strong IT spending growth.
"We've seen continued investments by companies as they prioritize the replacement of outdated technology, and pursue strategic IT initiatives focused on big data and analytics, cloud computing, and mobility,"said Ted Dangson, an IDC analyst, in the report.
Tech industry players also appear to be confident in the U.S. economy's ability to drive growth, said Hank Galligan, partner and director of the software practice at BDO USA, an accounting and consulting organization. Out of 100 technology company CFOs polled by BDO recently, most respondents -- 37 percent -- listed the economy as the most important factor driving growth in the sector, Galligan noted. In last year's BDO poll, 50 percent of the CFOs listed the economy as the most important factor driving tech growth, but the year-over-year decline does not necessarily mean the industry insiders are losing confidence, Galligan said.
"The expectation is a little more baked in, if you will: there's more confidence now that the recovery will continue and so it's not top-of-mind anymore," Galligan said.
Twenty-eight percent of the respondents in the BDO poll said that consumer demand for innovative personal tech would be the key factor fueling growth in the sector this year. Sequestration is not likely to affect that sentiment, Galligan said. "The type of person who wants the latest mobile phone every two years is going to do that whether or not there's that government cut back," Galligan noted.
One sector that all industry experts agree will be hit hard this year is hardware. Global PC shipments are projected to drop 1.3 percent in 2013, IDC forecast this week. The silver lining in that figure is that it's not as bad as the decline in 2012, which was 3.7 percent.