Tech investors finally lost patience and splurged on the ‘buy-the-dip’ investing strategy lately. After election, this once-soaring sector had fallen out of investors’ favor due to Trump’s uncertain immigration and trade policies.
Trump is actually expected to take stricter steps on immigration and outsourcing – the two pillars that the tech sector stands on. Speculation is rife that 35% tax will be levied on products manufactured outside the U.S.
In the last five trading sessions (as of November 16, 2016), the S&P 500-based (SPY - Free Report) added about 0.7%, Dow Jones-based (DIA - Free Report) tacked on over 1.6% gains and Nasdaq-100 based (QQQ - Free Report) was off 0.6%. However, tech behemoths including Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) and Apple Inc (AAPL) pushed up the ailing Nasdaq (read: Top-Ranked ETFs to Buy on Alphabet's Robust Q3 Results).
Investors should note that the earnings picture of the technology sector has been reassuring lately. Of 87.8% of the sector’s capitalization in the S&P 500 index, 83.8% beat on earnings and 75% on revenues in the third quarter. Earnings growth was 5.2% on 2.7% higher revenues, as per Earnings Reports published on November 9.
Barring Apple, the sector’s earnings would rise 12.6% on 5.5% higher revenues. Per the above-mentioned report, the performance was better than what we have seen from these companies in recent times.
Out of the 16 S&P sectors, technology is currently reasonably valued with 20x and 18.1X P/E respectively for 2016 and 2017 expected earnings. While this is in premium to the S&P index’s 18.8x and 16.7x P/E, respectively, the valuation lags the forward P/E ratio of consumer staples, retail wholesale, energy and business services.
The technology sector is said to be a cyclical one and performs well in a growing economy. Recent data points give cues of economic well-being. An influence of this uptick in the economy on the stock market was only natural. If stocks continue to do well, a wealth effect can be realized and tech stocks may prosper out of this cyclicality.
Coming to IPOs, here too, the technology sector grabbed investors’ attention in recent times. “Of the 18 tech IPOs in the U.S. this year, two-thirds are trading higher than their initial sale price”, as per Bloomberg. Now, Snapchat is getting ready for a $25 billion IPO. As per Marketwatch, investors now expect Snapchat to “unlock IPO market for tech unicorns.”
Having said these, we would like to highlight the tech ETFs that trumped the Trump-induced threat in the tech space over the last 10 days (as of November 16, 2016). These are (see all tech ETFs here):
SPDR S&P Technology Hardware ETF (XTH - Free Report)
SPDR S&P Semiconductor ETF (XSD - Free Report)
PowerShares S&P SmallCap Info Tech ETF (PSCT - Free Report)
ARK Web x.0 ETF (ARKW - Free Report)
iShares North American Tech-Multimedia Networking ETF (IGN - Free Report)
PureFunds ISE Cyber Security ETF (HACK - Free Report)
Can the Tech Surge Last?
Though it is tough to say whether the surge has legs, investors should note that we are not yet sure about Trump’s policies. Maybe, fears in the tech space are exaggerated. So, we are likely to see a rally in the above-mentioned ETFs as long as no new political or regulatory risk officially crops up in the space (read: 6 Stocks & ETFs to Avoid on Trump's Win).
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