Demand is Robust Despite 'White Knuckle Environment' For Tech, Says Dan Ives

Dan Ives, Global Head of Tech Research at Wedbush Securities, discusses the tech sector's resilience amid conflict in the Middle East.

Microsoft Corp. unveiled a four-year, $10 billion investment package for Japan, a major pillar of its Asia-wide artificial intelligence push.

The early OpenAI backer will develop cloud and AI infrastructure alongside Sakura Internet Inc. and telecom operator SoftBank Corp., with the two Japanese entities supplying graphics processing units and other computing resources. Sakura Internet’s stock jumped 20% on the news Friday, while shares of SoftBank, the telecom arm of investment group SoftBank Group Corp., rose 1.6%.

As part of the package, Microsoft, whose Copilot has struggled to keep pace with OpenAI’s ChatGPT and Google’s Gemini, will invest in cybersecurity partnerships and train a million AI engineers through 2029. But the biggest outlay would go to expanding the company’s cloud computing capacity and building new data centers, President Brad Smith said in an interview with Bloomberg and Japanese broadcaster TBS.

“We don’t build these things simply on the basis of a hope and a prayer. We build them on the basis of clear demand and demand signal,” he said, following a meeting with Japanese Prime Minister Sanae Takaichi. Acting too slowly would either mean losing market share to competitors or holding Japan behind, he said.

“We obviously have to keep our feet on the ground even as we move fast. And we do that.”  Technology stocks have returned to attractive levels for investors willing to play the long game after a pullback from last year’s record highs, according to veteran strategist Ed Yardeni.

Uncertainty around the impact of artificial intelligence on software businesses, coupled with the effects of the war on Iran, have pushed information technology stocks down 13% since the sector reached an all-time closing high in October. During that period, earnings estimates for the sector have accelerated, pushing its price-to-earnings multiple to 20.6. This is almost in line with the multiple of 19.6 for the S&P 500 Index.

“For investors with a multi-year horizon, this is an attractive entry point,” Yardeni said in a note sent to clients on Sunday.

The S&P 500 Information Technology Index closed 0.5% higher on Monday, extending its winning streak for a fourth day, its longest since late January. However, the sector is still down 7.1% so far this year, pressured by concerns over sky-high valuations, fears of AI disruption on software, and a risk-off mood taking hold.

Information technology, along with communication services, make up a majority of the S&P 500’s market capitalization. Yardeni said that this exceeds the dot-com era peak. While the comparison is likely to make some nervous, there is “more earnings support” for the high concentration in the market compared to over 26 years ago, he said. “Today, the forward earnings share of the two sectors, at 42.0%, is only 1.6 percentage points above the market-cap share,” said Yardeni. “At the dot-com peak, the gap between market-cap share and earnings share exceeded 15 percentage points. Today’s concentration is well deserved.”

Yardeni isn’t alone in signaling that information technology stocks have reached attractive valuations. Wells Fargo Investment Institute shifted their view on the sector from neutral to favorable, citing its underperformance against the S&P 500 and its durable outlook supported by the AI buildout.

The firm’s global investment strategy team said information technology has continued to show strong fundamentals despite concerns over valuations, capital spending and AI disruption. They pointed to double-digit earnings growth in the fourth quarter as an example.

The strategists also noted that information technology has outperformed the S&P 500 since war broke out between the US and Iran, underscoring the sector’s secular growth and quality characteristics.

“The gradual drawdown over the past few months has brought valuations to more attractive levels, and we believe pess

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