Tech stocks lead gains in 2009 and could again in 2010

In Wall Street's horse race among stock sectors this year, it won't be a photo finish: Big-name technology shares are way out front and still gaining ground.

Among the 10 major industry sectors in the Standard & Poor's 500 index, tech stocks have rallied 59 percent in 2009, on average, led by well-known names including Google (up 101 percent), Microsoft (59 percent) and IBM (55 percent).

The S&P tech sector's advance far outpaces the index's second-best sector, basic-materials stocks, up nearly 46 percent year-to-date, on average.

In third, fourth and fifth places, respectively: consumer discretionary stocks (homebuilders, retailers, restaurants), up 40 percent; industrial issues, up 19 percent; and health-care stocks, up 18 percent.

The S&P 500 index overall has gained nearly 25 percent for the year.

Of course, tech's performance in 2009 is partly a function of how far it fell in 2008, when the average tech issue in the S&P lost nearly 44 percent, worse than the 38 percent loss for the index overall.

But when Wall Street is relatively confident about the economic recovery continuing in 2010, tech continues to have widespread appeal among big money managers.

Tacoma-based Russell Investments, which surveys portfolio managers nationwide every three months, said its fourth-quarter poll found that 82 percent of managers were bullish on tech stocks' prospects in the near term. That was the highest bullish percentage for any of the 10 S&P industry sectors.

A year ago, amid the market's meltdown, the Russell survey pegged health-care stocks as managers' favorites — understandable, given the sector's "defensive" nature.

Even so, tech was a close second in that survey, with 62 percent of managers bullish about the industry compared with 66 percent for health care.

In the latest survey, Russell attributes tech stocks' allure to three main factors: solid growth prospects, strong balance sheets and, at least until recently, the weaker dollar, which can boost foreign earnings when they're brought home.

Tom O'Halloran, a portfolio manager at Lord Abbett & Co., put it this way in the survey: "I expect that technology will lead the market due to ongoing innovation, lean operating models, very strong financial structures, and a decade of neglect."

As for valuations, tech issues, like most stocks, aren't the screaming buys they were a year ago.

At this point, investors will have to decide whether they're comfortable paying 23 times estimated 2010 earnings per share for Google, for example, or whether they'd rather wait to see if 2010 brings a chance to buy at lower prices.