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Technology ETFs Set to Rally on Q1 Earnings

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The technology sector has been the top spot for investors’ and is on a stellar ride thanks to encouraging industry fundamentals and the emergence of new technology such as wearables, VR headsets, drones and virtual reality devices. The dual tailwind of a rising interest rate scenario and Trump’s proposed corporate tax reform, which could allow companies to bring back cash being held overseas at lower rates, are adding to the strength (read: 5 Hottest Tech ETFs of 2017).

As a result, four popular ETFs – Select Sector SPDR Technology ETF (XLK - Free Report) , Vanguard Information Technology ETF (VGT - Free Report) , iShares Dow Jones US Technology ETF (IYW - Free Report) and MSCI Information Technology Index ETF (FTEC - Free Report) – have gained in double digits so far this year. Notably, VGT, IYW and FTEC are up more than 13% while XLK added a little less of nearly 12%.

With most of the tech ace such as Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) lined up to report this week and in the next, the sector is taking the center stage. IYW has the largest concentration in these firms with a combined share of 43.8%, followed by 40.2% for VGT, 37.3% for XLK and 35.3% for FTEC.

Let’s dig deeper into the earnings picture of these companies that would drive the performance of the above-mentioned funds in the coming days:

According to the our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases the odds of an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Inside Our Surprise Prediction

Microsoft has a Zacks Rank #4 and an Earnings ESP of 0.00%. The Zacks Consensus Estimate for first-quarter 2017 decreased by a couple of cents over the past three months. However, the stock delivered positive earnings surprises in three of the last four quarters, with an average beat of 8.55%. The stock has a VGM Style Score of C. The company is expected to report after the closing bell on April 27.

Alphabet has a Zacks Rank #2 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. It witnessed a positive earnings estimate revision of 11 cents over the past 90 days for the to-be-reported quarter. Additionally, the earnings surprise track over the past four quarters is good with an average beat of 2.71%. The stock has a VGM Style Score of C. The company will report after the closing bell on April 27 (read: 4 ETFs to Profit Out of Cash Kings).

Apple is slated to release earnings after market close on May 2. The stock has a Zacks Rank #3 and an Earnings ESP of +1.00%, indicating lower chances of beating estimates this quarter. While the iPhone maker delivered positive earnings surprises in three of the last four quarters, with an average beat of 0.89%, it saw negative earnings estimate revision of three cents over the past 90 days for the to-be-reported quarter. The stock has a top VGM Style Score of A.

Facebook is expected to release its earnings report on May 3 after market close. It has a Zacks Rank #3 with an Earnings ESP of 0.00%, which makes surprise prediction difficult. Facebook delivered positive earnings surprises in the last four quarters, with an average beat of 19.53% and witnessed no earnings estimate revision over the past three months for the to-be-reported quarter. The stock has a solid VGM Style Score of B.

Summing Up

Overall, the tech sector is expected to post earnings growth of 11.2% in the first quarter 2017 compared with 9.2% growth in the fourth quarter 2016. Additionally, it has a solid rank in the top 25%, suggesting some outperformance in the weeks ahead (see: all the Technology ETFs here).

Given the favorable Zacks Rank and positive earnings outlook, surprises may well be in the cards. This could give further boost to the strength in the technology ETFs. In particular, the four ETFs mentioned above have a Zacks ETF Rank of 2.

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