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      JPM Equity Strategy: stay long tech

      1. Tech price relative is close to highs seen in early 2000, but the sector is not stretched on P/E relative metric. In contrast to the dot.com bubble, the current rally has been supported by strong earnings delivery. Tech, Staples and Pharma were the only three sectors to record positive earnings growth in Q2 ’20, while overall US EPS growth was down 33% yoy.

      2. In addition to resilient earnings growth, Tech has healthy balance sheets and strong cash flow generation, again in contrast to the 2000 episode. Consequently, buybacks remain a clear support for the sector.

      3. Another contributing factor to the sector’s strong outperformance is that it fits well in the Quality Growth category. This is confirmed by its negative correlation to bond yields – see bottom chart, to activity indicators such as PMIs, and by its falling beta to the broader market.

      4. Short term, Tech has been relatively less hurt by the current COVID-19 crisis, in particular when compared to consumer sectors. Parts of the Tech space have, in fact, taken greater market share during the current virus dislocation. Longer term, Tech remains the winner of the ongoing structural disruption, including the shift to AI and increased penetration of EVs.

      5. Is Tech concentration and momentum risk too high? While we share some of the concerns with respect to the stellar run of some momentum stocks this year, we note that many of the strongest performers ytd are, in fact, not categorized within MSCI Tech index. Out of the Top 30 names contributing to MSCI US performance, only a third of these are components of MSCI Tech index. While US Tech price relative is close to highs seen in early 2000, it is not as stretched in terms of the share of total market cap.

      6. How about the political risk for the sector? Our Tech sector analysts believe that a Biden victory might not be a negative for the sector. His policies do include the continued investigation of anti-competitive practices, but he has been less aggressive on this front compared to Elizabeth Warren, not arguing for a breakup of big Tech, and with the key targets likely to be Communication Services/Discretionary companies, rather than Tech names.

      JPM Equity Strategy: stay long tech
      Source: JPM