Strength in Technology Sector Could Drive Broader Market

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Published by Taylor Financial Group

We recently talked about the anticipated strong earnings season, which kicked off about two weeks ago.  It’s now in high gear, with more than a fifth of S&P 500 companies already reporting Q1 2018 earnings and revenue, and more company results on the way.  As of April 13, 2018, according to Thomson Reuters, of the 26 companies in the S&P 500 that have reported earnings for Q1 2018, 70% of those results have been above analyst expectations.  Ditto for Q1 revenue reported, with 76% of companies reporting revenue above expectations.  And, as of this past Friday, the percentage of companies beating expectations had increased to 81%, according to Barron’s, with hundreds of more companies slated to release quarterly earnings this week.

The market overall is reporting strong earnings and it’s quite exhilarating, but let’s focus in on how the technology sector is a key player this earnings season.

Tech Stock Strength

According to the Wall Street Journal (WSJ), market behavior from two weeks ago demonstrated that technology stocks are rallying and can continue to drive the broader market.  The WSJ also reports that earnings results could and should help reinforce tech stocks.

JP Morgan reported last week that the current earnings per share (EPS) estimates indicate year-over-year growth of 24%, with particular strength in the technology sector, as well as the financials, energy and telecom sectors.  These estimates are due in large part to the Tax Cuts and Jobs Act, which reportedly caused earnings estimates to go up 7.2%.  As of last week, analyst earnings estimates had hit somewhat of a peak, as seen in JP Morgan’s Chart of the Week, but remained in a positive zone.  So, while we may see a slight slowdown in upward earnings revisions, investors should remain optimistic and not expect weakening.

High Expectations and Volatility

Some analysts believe that these high expectations for tech companies could actually work against them, with one Goldman Sachs analyst noting that a “shortfall relative to expectations would put the share price at risk.”  And, of course, market volatility remains a reality and one that will likely continue throughout the year.  However, as of right now, it appears that we can count on technology to continue to drive this market and, at the very least, we can hope for less severe corrections thanks to the strong earnings and the fact that the market is still trading 7% off its high.  As we’ve mentioned before, we know that volatility can often feel threatening, but we urge you to stay positive and stay the course.

If you have questions about the markets or your portfolio, give us a call and we will gladly address your concerns.

 

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