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Why Tech Stocks May Still Have Room to Grow

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Tech stocks continue to outperform broader markets

Investors continue to rush to large-cap technology stocks (IYK). The tech-heavy NASDAQ Composite Index (COMP-INDEX) has risen 6.3% YTD (year-to-date) compared to the 2.8% rise in the broader S&P 500 Index (SPX-INDEX). The tech sector performed well even during the recent correction in the broader markets.

Tech giants such as Amazon (AMZN) and Netflix (NFLX) have continued to outperform, surging over 28% and 46.3%, respectively, in 2018. Robust earnings growth in the sector continues to draw investors, even if it is at a premium cost. Though investors remain wary of corrections, given rich valuations, they seem to buy major tech stocks on dips.

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Tech stocks may have short-term headwinds but could continue to surge

However, tech seems to have become a very crowded trade. The sector faces short-term headwinds such as rich valuation, inflation risk, and the possibility of more rate hikes.

That said, the tech sector is more dynamic than ever. Areas such as cloud-computing, artificial intelligence (or AI), and the Internet of Things seem very promising. Despite their sizes, tech companies have shown that they can grow at a brisk pace. Amazon, for example, has seen 20 consecutive years of double-digit revenue growth. For this reason, technology stocks likely deserve a decent share of your portfolio in the long term.

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