Megacap tech may be the ultimate ‘quality’ play in an uncertain economy, The ETF Store president suggests
There may be a case to bet on technology stocks, even if interest rates remain higher for longer.
While conventional wisdom suggests high rates should punish the group, investors still favor the earnings growth offered by megacap tech stocks, according to The ETF Store President Nate Geraci.
"Investors are viewing megacap tech as a quality play," he told CNBC's "ETF Edge" on Monday. "These companies have tangible earnings. They have cash on the balance sheet."
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Technology is currently the largest sector in the S&P 500 per FactSet, comprising nearly 30% of the index. The sector's earnings growth rate is projected to reach 23.7% for the first quarter, versus 7.8% for the S&P overall, according to LSEG as of Tuesday.
Even if a U.S. economic slowdown takes hold, Geraci thinks quality tech names can remain in a leadership role.
"In that scenario, investors want earnings, they want cash flow, they want things that they can see and feel and touch right now. I really think it's that simple."
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Still, not all tech has fared equally as well in recent months, with Cathie Wood's suite of Ark funds among the most pressured names. The flagship Ark Innovation ETF (ARKK) is down 15% since the start of the year, as of Wednesday's close, compared to a 9% gain in the S&P 500 during the same period.
Ark Innovation's top three holdings are Tesla, Roku and Coinbase, according to FactSet. Geraci suggested the growth-oriented group could stay on the back burner with investors for a while.
"We have had some inflation data that has been hotter than expected, and so investors are shying away from those speculative bets, like you see in something like ARKK," he said. "I think that causes investors to rethink making bets on companies with earnings that are far out into the future."
