RiverFront Keeps Overweight on U.S. Tech, Watches Cash Flow

RiverFront will maintain an overweight position in U.S. technology, citing current valuations well below the late-1990s peak and free cash flow that exceeds operating profit. The firm wrote it would begin trimming tech holdings if free cash flow starts to meaningfully trail earnings before interest and taxes (EBIT) across the sector.

The firm noted the MSCI USA Information Technology Index trades at about 23 times forward earnings, versus roughly 40 times at the 1999 peak. RiverFront reported profit margins near 26% today compared with about 13% in 1999, and said the tech sector shows stronger revenue and earnings growth than in the dot-com period.

Cash generation was identified as the primary signal the firm will watch. RiverFront said that in the late 1990s reported operating profit rose faster than cash generation before the market downturn. It reported that today free cash flow across U.S. technology runs above EBIT and is approaching $1 trillion on an annualized basis. The firm wrote it would base reductions on a sustained inversion of that relationship rather than on headline valuation multiples or individual macro headlines.

RiverFront listed risk factors that could pressure growth stocks, including the conflict involving Iran, elevated energy costs and a higher-for-longer interest-rate outlook, conditions that typically compress valuations for long-duration companies. The firm pointed to a softer-than-expected core consumer price index print and relatively weak unit labor costs as partial relief for inflation, while noting monetary policy remains an important variable to monitor.

On IPO supply, RiverFront wrote that the scale of U.S. equity markets limits the effect of any single large offering. The firm cited roughly $77 trillion in the Russell 3000 and about $65 trillion in the S&P 500, and noted about $8 trillion in money market balances. RiverFront reported roughly 100 expected IPOs this year versus about 250 in 2021 and 400 in 1999, and it expects buybacks and merger activity to offset much of the new issuance.

The firm pointed to a one-day Nasdaq drop of about 5% on June 5 as an example of routine volatility and wrote that it prefers to monitor cash-flow trends rather than treat every price correction as a reason to exit. Author Chris Konstantinos wrote, “The party continues — and we intend to stay for a while.” RiverFront reiterated that all investing carries risk, including the loss of principal, and that market conditions can change.