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Big Techs Prove Why the Sector Is a Safe Haven Amid Pandemic

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July 30 was an interesting day for Wall Street. Before markets opened, back-to-back bad news dented investors' sentiments. The country's GDP in second-quarter 2020 plunged 32.9% year over year, marking the largest-ever decline in a quarter, and the initial jobless claims data showed an increasing trend for the second consecutive week. However, after the closing bell, market participants were delighted as four technology behemoths declared blowout earnings results.

Notably, Apple Inc. (AAPL - Free Report) , Inc. (AMZN - Free Report) , Facebook Inc. (FB - Free Report) and Alphabet Inc. (GOOGL - Free Report) significantly surpassed both earnings and revenue expectations. Moreover, sales of iPhones surprised to the upside — 26.4 million versus 22.4 million expected.

Amazon's earnings per share nearly doubled year over year. Both Daily Active Users and Monthly Active Users of Facebook rose 12% year over year. Sales at Google’s cloud business jumped 43%, while YouTube ad revenues rose 6%.

Earlier this month, tech giant Microsoft Corp. (MSFT - Free Report) outpaced both earnings and revenue expectations for the last-reported quarter. Semiconductor major Qualcomm Inc. (QCOM - Free Report) and cloud-based multi-channel commerce platform Shopify Inc. (SHOP - Free Report) also reported blowout earnings results.

Big Techs Justify Sector's High Valuation

The Technology Select Sector SPDR (XLK), one of the 11 broad sectors of the S&P 500 Index, has rallied 17.5% year to date. The tech heavy Nasdaq Composite is in positive territory year to date with a gain of 18%. In contrast, the benchmark S&P 500 Index has just managed to enter positive territory and is up a mere 0.5% so far this year while the Dow is yet to recover 7.8% to become green.

This overwhelming performance prompted several economists and financial experts to comment that the technology sector is overvalued. They even suggested that a second wave of COVID-19 in the United States and several other large economies will ultimately burst the technology bubble.

Then again, impressive performances by big tech brothers and several other companies in this sector indicate its inherent strength and growth potential. This is particularly true as these companies have defied coronavirus-induced global economic devastations, when most other sectors are struggling to stay afloat.

Looking at second-quarter earnings results, 38.1% of the tech sector’s market cap in the S&P 500 companies has already reported as of Jul 29. Total earnings of these companies are down 5.9% from the same period last year on 0.3% higher revenues. After the releases from the four big techs on Jul 30, the technology sector's performance is expected to improve.

Tech Momentum to Continue

We must not forget that growing demand for high-tech superior products has been a silver lining for the technology sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, has boosted the overall space.

Let's consider that the coronavirus related problems will stay in 2020 and no vaccine or a definite line of treatment will appear in the near future. Even then, the technology sector will survive. The outbreak of coronavirus globally has established digitization as the new normal for what is being touted as going to be a very long time.

As social distancing is keeping near and dear ones away, people, especially the citizens of emerging and less-developed countries, are reaching out more than ever with smartphones, tablets or notebooks.

The thrust for digitization is likely to come from two sides. Individuals who enjoy immense benefits of digital platforms are less likely to go back to their old habits. The new way of connecting with one another has opened up a new world for them. Also, business entities will be more interested in cloud computing, automation and artificial intelligence to establish smooth supply chain systems. 

Therefore, coronavirus or no coronavirus, the north bound journey of the technology sector is likely to continue.

Currently, Shopify sports a Zacks Rank #1 (Strong Buy) while all the other stocks mentioned-above carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of seven stocks mentioned-above year to date.


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