The S&P 500 has rallied to within 1.3% of its all-time high, set on September 20th last year. The Philly SOX index closed at a new record on Friday, 2.2% above the previous peak set on March 12th last year. Information Technology has been the top performing sector this year, rising 22.41%, closely followed by industrials (+19.73%) and consumer discretionary (+19.04%).
Friday’s labour market report revealed a rebound in hiring, but more importantly, the details show why IT companies are once again leading the S&P 500 higher. Payroll growth was strong in professional & business services (up 37k m/m and 2.56% y/y).
Within this, there were notable accelerations for the three tech-related sectors, with payrolls up 4.11% y/y for computer systems design & related services, up 4.25% y/y in management & technical consulting services and expanding 5.66% y/y in scientific research & development services. In all three cases, the annual rate of increase has turned higher this year.
These large IT companies have helped drive (private sector) R&D investment up sharply in the US, to a record high as a share of real GDP (2.26%, Q4 2018). However, the real winners of this innovation will be the smaller companies that benefit from bigger servers, faster connectivity, 5G, the internet of things, driverless cars, and AR. This will allow the IT index in the S&P 500 to rise well above last year’s high, extending the current 10-year bull market.
The Fed will in turn be less inclined to cut interest rates. President Trump is trying his best to undermine Fed impartiality, but the majority of FOMC members are likely to stand firm if the S&P 500 rises comfortably past 3,000.
