US technology stocks are beating earnings expectations and markets anticipate 2024 revenues and EPS growth of around twice the wider stock market. Investor enthusiasm has driven valuations up and raised tech stock dispersion and volatility. Lombard Odier has increased their allocations to US stocks, with a preference for communication services, while keeping their global exposure to the tech sector at strategic levels. They see the dollar appreciating in the first half of 2024, before political risks and global economic recovery weaken the currency. Lombard Odier remains overweight the US currency. Fourth-quarter corporate reporting in the US has been strong so far compared with expectations, as earnings per share (EPS) have risen around 2% from a year earlier. Markets now expect IT sector revenue growth in 2024 of around 10%, and around 22% for EPS, double the levels anticipated for the wider market. The US tech sector is supported not only by demand for generative AI semiconductors, but by innovations in digitalisation and cloud computing. It also continues to report strong cash flows and investment levels. Companies are addressing profitability through cost measures including slower hiring, and cutting back on projects. If revenues recover in line with market expectations and cash flow and profitability are maintained, there is scope for further share price gains. Within tech and its related sectors, Lombard Odier prefers communication services, which include some of the largest American stocks by market capitalisation. At the global level, technology valuations are also high. The MSCI World IT index is trading at around 26-times full-year forward earnings, compared with its long-term average of 17-times. High valuations are the main reason that Lombard Odier keeps their exposure to the tech sector globally at strategic levels. The wider S&P 500’s valuations are around 21-times 12-month forward earnings, far higher than the index’s 16-times average for the last quarter century, and currently more than 10% above its 200-day moving average. Lombard Odier has increased their tactical exposure to the US market to overweight levels compared with their strategic benchmark, while they underweight their eurozone equity exposure. Lombard Odier has revised their strategic asset allocation to increase exposure to the outperforming US equity market. Their higher exposure to US stocks in portfolios also mechanically implies a higher exposure to the dollar. Fundamentals for the currency remain supportive, even after the dollar’s rise in value in the early months of the year – driven both by US growth upgrades, and a pushback in investor expectations for a first US rate cut. The dollar remains one of the highest-yielding currencies in the G10, drawing in foreign investment. It is also likely to retain this yield advantage even once the Federal Reserve starts to cut interest rates. While a resilient US economy continues to support the currency, so does softer growth in the rest of the world. As a defensive, haven currency, the dollar tends to rise in a global growth slowdown. By some measures the dollar appears overvalued, which suggests a limit on the scope of gains from here. Yet the degree of overvaluation versus history may be smaller when accounting for recent structural changes, such as the US transitioning from a large energy importer to a small exporter, and by rising US productivity. Lombard Odier sees further gains for the dollar in the first half, with a three-month euro-dollar target of 1.04. In the second half of 2024, US political risks will become more important in the run up to presidential elections. In the meantime any recovery in global growth, perhaps from more forceful China stimulus, would also be negative for the dollar. For now, Lombard Odier retains an overweight to the dollar in portfolios.