Tech stocks are about to close out their best year since the rebound from the financial crisis.
With December winding down, the S&P 500 information technology index, consisting of 70 members, has gained 48% in 2019, marking the best year for the group since a 60% jump in 2009.
The difference a decade ago was that the tech index was coming off 2008, in which it plunged 44%, creating a buying opportunity and setting the stage for a so-called dead cat bounce.
This time around, tech stocks dipped just 1.6% in 2018 before rallying to new heights in 2019, suggesting that the latest surge is backed by the strengthening financial position of the companies in the group and optimism for the broader economy.
Leading the index this year were a bunch of semiconductor makers and chip equipment companies. And Apple.
Keep in mind, this index doesn't include internet companies, so the mega-cap FANG (Facebook, Amazon, Netflix, Google — now Alphabet) stocks fall into different S&P 500 subgroups. Even so, among the FANG stocks, only Facebook has outperformed the tech index, while each of the others underperformed by at least 18 percentage points.
"The FANG trade did not work out this year," said Jake Dollarhide, CEO of Longbow Asset Management, which oversees $110 million in assets and is overweight tech stocks. "Other tech plays stepped up. A lot of it is consumer thirst for more and more mobile technology."
Chipmaker Advanced Micro Devices was the biggest gainer in the S&P tech index as of Thursday's close, climbing 153%, followed by semiconductor equipment manufacturer Lam Research's 117% gain. KLA, which also supplies the chip industry, rose 100%, and Qorvo, a supplier of radio frequency technology for iPhones, surged 94%. Apple was the eighth-best performer, gaining 84%, but because of its size, the iPhone maker was by far the top contributor to the index's gain.
Despite a saturated smartphone market and perpetual concern that the iPhone can't get any better or more powerful, Apple continues to lure consumers with new features and options and is reportedly preparing to offer models in 2020 that are both smaller and larger than those currently available. In October, Apple reported a 9% decline in iPhone sales, which marked an improvement over previous quarters, and CEO Tim Cook expressed optimism "about what the holiday quarter has in store."
In addition to bolstering the iPhone with cutting-edge camera technology, improved battery life and upgraded speakers, Apple has also created another fast-growth business: The wearables unit boosted sales by 50% from a year ago in the latest quarter, thanks to the popularity of the Apple Watch and AirPods.
Meanwhile, Apple avoided tariffs on its core products after President Donald Trump announced this month that the U.S. had reached a "phase one" trade deal with China.
That all works in favor of Apple suppliers like Qorvo, which counts on the iPhone maker for about one-third of its revenue. Chipmaker AMD provides graphics processors to some Apple iMacs and MacBook Pros. And Skyworks, which has jumped 82% this year for the ninth-best performance in the tech index, gets half its revenue selling mobile chips to Apple and its various contract manufacturers.
Micron, which provides memory technology to Apple, is the 14th-best gainer in the index, up 74%.
"This is an Apple world and we're just lucky enough to live in it," Dollarhide said.
In the chip equipment market, Lam and KLA are benefiting from a trend that includes Apple but extends to the wider explosion of mobile devices. As the world prepares for 5G high-speed networks, manufacturers are developing more connected devices, which means more microprocessors.
To meet that demand, large chipmakers like Intel, Samsung and Taiwan Semiconductor Manufacturing (TSMC) are boosting their spending on equipment from top suppliers.
Lam and KLA had agreed to merge in 2015 in a $10.6 billion deal, but they canceled their plans amid antitrust concerns. Lam is now closing out its best year since 2003, and KLA is enjoying its biggest annual rally since 1999.
"We are likely entering a decade+ expansionary period in the semiconductor industry as compute applications grow beyond PCs, phones, and tablets," wrote Weston Twigg, an analyst at KeyBanc Capital Markets, in a report last month on Lam. He recommends buying the stock. "The ramp of 5G should enable more connected devices and a meaningful ramp in edge compute."
Outside of consumer gadgets, the S&P tech group has reaped the benefits of the ongoing movement to the cloud.
Microsoft, spurred by growth in its Azure cloud infrastructure and Office 365 applications, has climbed 56% this year, propelling the company to a $1.2 trillion market cap, second only to Apple ($1.29 trillion) among U.S. companies.
Adobe and Autodesk, two companies that have transitioned in recent years from traditional packaged software to the cloud, are each up more than 43%, while ServiceNow, a provider of cloud IT services that just joined the S&P 500 last month, is up 61%.
DXC Technology is the biggest decliner in the index and is showing how difficult it is for some businesses to adapt to the cloud computing wave. The company, established two years ago through the combination of Hewlett-Packard's enterprise services unit with Computer Sciences Corp., is down 30% this year, after suffering a plunge of that size on a single day in August. In reporting quarterly earnings, DXC provided a disappointing sales and earnings forecast, which reflected a deterioration in the company's outsourcing business and the "stranded costs" from the legacy way of doing business in traditional data centers.
But only seven of the index's 70 members are poised to end the year in the red. Heading into 2020, the pressure is on to deliver results, particularly for the highest-growth companies.
The index had a price-to-sales ratio of 5, the highest since 2000, according to FactSet. Apple is trading at a historically high multiple to earnings, and Microsoft is expensive relative to its average over the last few years.
Given uncertainties surrounding trade with China, the global economy and the election in November, tech bulls will see next year whether the industry's momentum can withstand all the macro headwinds.