Wednesday, December 19, 2018

Goldman Sachs Predicts Slower Information Technology Spending Growth in 2019 - 24/7 Wall St.

When stock markets become volatile, creating outlooks and looking at actual results can become much more difficult. The recent drop in the equity markets has landed the Dow Jones industrials, S&P 500 and Nasdaq in correction territory, after selling off more than 10% from recent highs. Many investors have been hoping that the information technology (IT) sector will hold up in 2019. There are some reasons to wonder just how much “growth” will be in what has been one of the largest growth sectors of all.

Goldman Sachs has featured its December 2018 IT Spending Survey, showing a significantly lower climate ahead. Investors should take note that corporate technology spending plans are now running at a four-year low. Goldman Sachs believes the end result is from ongoing macro issues, trade disputes and fluctuations in commodity prices. Even Brexit has been thrown into the mix. While this may seem as though it is a limited report, Goldman Sachs is not alone in its view that IT spending will see slower growth in 2019 than in 2018.

The firm’s IT spending index fell to 66.5 in December. This is a survey of 100 corporate technology buyers, and while 100 may seem small, the drop from the same pool of people is from 80 just in June.

Before panicking unilaterally, note that this is another area of spending that still represents growth rather than actual contraction. Spending plans for IT are expected to grow at a slower pace in 2019. Cloud spending plans are actually higher than in prior surveys. Microsoft’s Azure and Google’s cloud platform have been shown to be gaining traction in recent months. The cloud angle is obvious on some fronts: lower costs, ease of scale and better cost efficiencies.

Where things were weaker was on legacy hardware (like PC use and servers) and in networking equipment. Almost 40% of the pool expects to spend less on servers in 2019. And storage and networking was also lower than in June.

If you go back to the June report, the top growth areas were security, software-as-a-service (Saas), business intelligence, analytics and private/public cloud adoption.

As noted, Goldman Sachs is not the only one calling for a slowdown in IT and overall capital spending plans in 2019. We have seen reports from Gartner Group and the Japanese government, and Merrill Lynch has shown its own industry carnage measurement of late during the market volatility.

Gartner issued a 2019 outlook about two months ago, and the firm projected that worldwide IT spending should rise just 3.2% to $3.8 trillion in 2019. Gartner had issued a forecast earlier in 2018 that overall global IT spending would rise 6.2% in 2018 with a $3.7 trillion figure.

While some of the challenges can be blamed on the ongoing issues with China and other macro factors, the Japanese government just lowered its expectations for capital spending in 2019 from the slowing global economy. That spending is now expected to grow by 2.7% in 2019, compared with a previous government forecast of 3.4%.

It is not that surprising that the technology sector has been so weak, with the market volatility and yet more evidence of slower spending growth in 2019. Merrill Lynch’s IT sector performance report from the same day said:

The Information Technology sector is down by -6.69% over the last 1 Month, with 6 out of 6 industries declining. This move was led by stocks in the Technology Hardware, Storage & Peripherals and Electronic Equipment, Instruments & Components industries, which were down -14.49% and -5.70%, respectively.

The performance of the Technology Select Sector SPDR Fund (NYSE: XLK) may signal all you need to know. While it was up 0.7% at $63.65 on Tuesday, this key technology exchange traded fund is down over 16% from its 2018 all-time high of $76.27.

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