Technology stocks have had a strong run in the past several months, with much of the returns based on their small-cap bias, according to a report by Satya D. Pradhuman, vice president of Merrill Lynch & Co., New York.
Mr. Pradhuman predicts the strength of technology might be a long-term phenomenon given the potential slowing of the economy. In such an environment, emerging growth strategies outperform small-capitalization value themes, the report said. In addition, earnings growth forecasts for the small-cap technology sector have fallen relative to those of the large-cap technology sector since 1989.
"Because the expectations are more tempered, we believe investors may be more able to withstand any unwelcome earnings news thus creating a less volatile environment," according to the report.
As earnings become more abundant, value-based strategies outperform. But as forecasts slow, strategies of an emerging growth nature tend to outperform, the report said.
Of course, given the long-term nature of emerging growth strategies, the stocks are highly vulnerable in the event of a spike in interest rates, the report warned.
