The tech-heavy index trounced the Dow and S&P 500 in the first half of 2009. But have tech stocks outpaced the economy, too?

By Ben Steverman

Blue Chip Investing

Tech stocks were stock market stars, beating every other sector by a wide margin. Of the three sectors that actually moved higher, consumer discretionary stocks rose 9% and the small materials sector gained 14%. By contrast, information technology stocks jumped 25%.

Because so many tech stocks are in the Nasdaq composite index, it trounced other major indexes. Portfolio managers cite several reasons why tech was so attractive in 2009 despite the severe recession.

Techs slashed inventories and output

“Tech got hammered in the second half of last year,” says Richard Parower, portfolio manager of RiverSource Investments.

But tech executives had learned lessons from the severe downturn earlier this decade. With so much bad news already factored into their stock prices, tech shares started attracting bargain-hunting value investors. “These stocks were considered too cheap,” says David Stepherson, portfolio manager at Hardesty Capital Management.

When conditions were gloomy, says Uri Landesman of ING Investment Management (ING), investors were attracted by tech companies’ strong balance sheets. With lots of cash and little debt, tech firms didn’t need to rely on frozen credit markets for financing.

When credit conditions stabilized and investors began to hope for a recovery, tech stocks rose on hopes they would share in a return to prosperity.

M&A stirred interest in tech

Many tech firms will be among the first stocks to benefit from a better economy, Stepherson says. Companies have learned that tech spending pays off, particularly in boosting the productivity of firms hit by layoffs. Other factors have helped tech, experts say. Other stock market sectors are weighed down by worries about new regulations from Washington that could raise costs. “The government regulatory magnifying glass isn’t on [the tech] sector,” Stepherson says.

Parower notes that the tech sector could be hurt or helped by new regulations on other sectors: For example, tough new rules on financial firms could leave Wall Street with less money to buy tech products. As the economy improves, Rogé expects other, more economically sensitive stocks—such as commodities producers—to beat out tech stocks.

A key factor for technology stocks will probably be earnings reports. “We’ve been expecting tech to tread water here for a while.”

But Landesman argues that tech stocks remain reasonably priced because the sector has a good chance of beating the market’s earnings expectations as the economy improves

Much may depend on whether the U.S. economy improves fast enough to meet investors’ heightened expectations for the tech sector.