Citi analysts Scott T Chronert and Louis L Odette examine the performance of small and midcap tech stocks at this point in the earnings reporting season in their “SMID Cap Rap” study of October 25, 2013.

Q3 shows a positive profile versus index

Approximately a quarter of the RUT techs and 37% of the RMC are through with reporting and tended to surprise positively at 65% and 71% respectively. The Citi analysts ascribe this outperformance to “a lowered Q3 earnings bar.” Going forward into the rest of the reporting season the surprise ratios are likely to decline, but the trend so far is strong.

SMID tech stocks’ relative performance

However, after a solid run up since May (RUT Techs are +30%, RMC +15%), relative performance is down after mid-September as per the chart below:

1-smid-relative tech stocks

Primarily, this correction (“near term turbulence”) is due to tempered Q4 guidance encompassing both in-company and macro-economic factors. Also, good news may already be priced in, judging from the +7% rise in the Russell 2000 since the first week of October.

Current turbulence precipitated by semis and hardware

The table below shows that the sectors ‘Semiconductors & Semiconductor Equipment’ and ‘Technology Hardware & Equipment’ were primarily responsible for the under-performance over the most recent past.

2-q3-underperformance-5-days Tech stocks

Not surprisingly, these two sectors are the strongest on Q3 positive surprises:

Tech stocks surprises-ratio

The authors ascribe the correlation to softer (cautious?) Q4 commentary from companies, particularly after strong Q3 reporting, coupled with a resetting of expectations for 2014 – downwards in some cases. This meshes well with Citi’s 2014 Preview that said 2014 growth assumptions were aggressive.


Heading into the end of the year, the Citi analysts stand by their ‘economic sensitive investment focus,’ given that relative performance from Energy, Industrials and Materials is robust. Also note that the last quarter has traditionally been strong for Tech, hence the analysts expect that the sector will recoup some relative strength as we come to the close of 2014.