As Sam Sees It: Is the Market Paying the Toll of Tech?

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market. 

EQ: This week, the market saw a number of major tech companies beat on estimates. Yet, the stocks traded down in spite of what on the surface looked like positive numbers. There was a lot of talk that while Wall Street numbers were beat, a lot of these companies did not hit their “whisper numbers”. First off, what are whisper numbers and why should investors pay attention to them?

Stovall: Whisper numbers are the numbers that are thrown about, in a sense, by professionals on Wall Street that usually are higher or lower than the more widely available published estimates. They’re important because people on Wall Street are always trying to get an upper hand on other people on Wall Street to try to make as much money as possible.

The problem for a typical investor is that they don’t really have access to these whisper numbers, and so, it’s very challenging to be able to trade off of that. I think what you have to do is look seasonally at the sector and realize that the third quarter is typically a weak quarter for Technology. So after the second quarter numbers have been reported, we usually see softness in the overall Tech sector.

EQ: We’ve talked a lot in the past about how successful corporate management has been at setting low bars to clear. Are whisper numbers a logical progression of that prolonged relationship dynamic?

Stovall: That’s probably a good way of summarizing it. The estimates are those that are published by the analysts based on guidance from management and combined with their own estimates of what they see in the economy as well as the particular sector. This quarter, the bar was basically set underground because the estimate was for an almost 4.5% decline in the S&P 500, with only Energy, Consumer Staples and Utilities expected to show declines. So when the earnings come out, usually they end up beating those estimates. Right now, while S&P Capital IQ is still expecting earnings growth to be negative, they are certainly a lot less negative than earlier estimates.

EQ: Looking at Wednesday’s action, the drop in the major Technology stocks weighed on the major indices. Is Tech disproportionately or accurately represented given how significant this group is to the market?

Stovall: I think it’s because the NASDAQ went on to set all-time highs while the Dow and the S&P 500 did not, and we’ve had the Tech stocks do exceptionally well in the last couple of weeks leading up to their earnings reports. So the reason why the attention seems to be disproportionate is because of the move that was just made.

There’s an old saying that you buy on rumor but sell on fact, and I think that’s what’s happened here as investors are selling after the earnings have been reported. So because most of the carnage is occurring in Tech, that’s why it’s getting a disproportionate amount of the attention.

EQ: Sector weighting is a topic you discussed in this week’s Sector Watch report. The group that you examined was Health Care’s impressive outperformance since 2010. How well did Health Care do over the past five years?

Stovall: Health Care has done exceptionally well. Since the end of 2010 through Friday, July 17, 2015, the group was up 144% while the S&P 500 was up 69% during that time. Six of the 10 sectors in the S&P 500 actually underperformed the index itself during that run as well. So Health Care was by far the best sector, and only had three other sectors join it above the overall market.

EQ: Health Care’s growth in value during this time has resulted in the group becoming a larger component of the S&P 500 from a sector perspective. Despite the aggressive growth rate, why do you feel that the sector has enough catalysts to sustain and expand its weighting in the S&P 500?

Stovall: Today, the Health Care sector makes up 15.5% of the S&P 500. Its all-time high was 15.9%, but since 1994, the three prior times in which Health Care was above 15%, we were in the midst of mega-meltdowns in the stock market, meaning declines of 40% or more. The first time was right after the September 11th attack. The second time was in 2003 as we successfully retested the October of 2002 low. Finally, the third time was in January 2009 as a flight to safety where investors gravitated toward those sectors where the demand for the products and services remained fairly static.

This time around, however, we believe that the weight gain is a result of sector-specific issues, in particular, the driving of the Affordable Care Act because of the double-digit millions of people that have been projected by the Department of Health and Human Services that needs to sign up for the ACA before all is said and done. So we have many more people out there who need to sign up that have yet to do so, which we think will help benefit a lot of the groups within Health Care.

One group in particular is Biotech, which represented only about 10% in 2001, now represents over 20% today of the sector mainly because of good growth in that sub-industry. Its earnings growth actually places its valuation below that of the overall Health Care sector and the market as a whole.

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