Wall Street's impressive V-shaped recovery from the coronavirus-led bear market and the formation of a new bull market suffered severe halts in the last three trading days. Concerns of a second surge in COVID-19 outbreak, National Bureau of Economic Research or NBER's statement that the U.S. economy is in recession and the Fed's gloomy outlook on the recovery of a coronavirus-stricken economy resulted in severe market turmoil.
In the last three trading days, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — tumbled 9%, 7.2% and 4.3%, respectively. Meanwhile, market's favorite fear gauge, the CBOE VIX, jumped more than 53% to reach above 40 from mid 20s. However, despite the stock market rout, the technology sector is still holding forth.
Three Near Term Concerns
On Jun 8, the NBER stated that the U.S. economy has fallen in recession since mid-February, ending the historically longest 128 months of expansion. Moreover, the World Bank, the IMF and OECD forecast that the global economy will shrink 5.2%, 3% and 6%, respectively, in 2020 due to coronavirus-induced devastations.
On Jun 9, after its two-day FOMC meeting, the Fed projected the U.S. GDP will decline by 6.5% in 2020 before recovering at 5% in 2021. The unemployment rate will stay at 9.3% by this year end. The central bank has expressed that it would maintain 0% interest rate and asset buyback programs till 2022 and expects to maintain this target "until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Moreover, investors remain highly concerned about the second wave of coronavirus cases which will significantly delay the just-started reopening process of the economy. The seven-day average of new cases over the past two weeks is still rising in more than 20 states. So far 2 million people have infected and more than 112,000 lived have been claimed by COVID-19 in the United States.
A Sliver Line
A series of better-than-expected economic data were recently released following the systematically reopening of the U.S. economy is systematically reopening after over two months of lockdowns. May's job additions recorded a historic high of 2.5 million and unemployment rate dropped to 13.3% from 14.7% in April. Initial jobless claims declined for the 10th consecutive week since its peak in the last week of March.
In addition to job data, growing consumer confidence, better-than-expected ISM manufacturing and services index, and a solid increase in housing and vehicle sales clearly showed strong pent-up demand.
Meanwhile, on Jun 11, Treasury Secretary Steven Mnuchin said that a second round of lockdown is not a viable option as it will create more damage than combating coronavirus. He also said that the Trump administration is considering another round of fiscal stimulus of more than $1 trillion next month.
Technology Sector is the Best
The technology sector is holding ground defying coronavirus-induced severe volatility. The Technology Select Sector SPDR (XLK), the largest among the 11 broad sectors of the S&P 500 index, is positive year to date with a gain of 7.1%. The Communication Services Select Sector SPDR (XLC) is the other sector to remain in green year to date with a marginal gain of 0.04%. The tech-laden Nasdaq Composite is still up 5.8% year to date despite yesterday's setback.
The last few years witnessed a series of breakthroughs in cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, which have set the stage for robust growth. In this regard, large-scale commercial deployment of 5G wireless network has boosted the overall technology sector.
Our Top Picks
At this stage, it will be prudent to invest in large-cap tech stocks with a favorable Zacks Rank. We have narrowed down our search to five such stocks that have strong growth potential for 2020 and robust EPS estimate revisions. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past three months.
NVIDIA Corp. NVDA is gaining decent market share among the gaming service providers. The strong line-up of advanced graphics cards has made it a favorite graphics card provider among PC makers. Its foray into the autonomous vehicles space is a major positive. NVIDIA’s GPUs are rapidly gaining from the proliferation of artificial intelligence.
The company has an expected earnings growth rate of 36.4% for the current year (ending January 2021). The Zacks Consensus Estimate for current-year earnings has improved by 4.2% over the past 30 days.
Applied Materials Inc. AMAT provides manufacturing equipment, services and software to the semiconductor, display and related industries. Moreover, it has been gaining considerable success in expanding beyond semiconductors. Rapid growth in large-format TVs has opened up opportunities for Applied Materials.
The company has an expected earnings growth rate of 25.3% for the current year (ending October 2020). The Zacks Consensus Estimate for current-year earnings has improved by 2.7% over the past 30 days.
Zoom Video Communications Inc. ZM provides a video-first communications platform worldwide. It is a major gainer of the coronavirus-induced remote working trend. Demand for its platform and solutions is expected to remain robust as some form of social distancing will be required until a vaccine or any effective treatment for coronavirus is developed.
The company has an expected earnings growth rate of 237.1% for the current year (ending January 2021). The Zacks Consensus Estimate for current-year earnings remained flat over the past 7 days.
ServiceNow Inc. NOW provides cloud computing services that automate digital workflows to accelerate enterprise IT operations. It is rapidly expanding into non-ITSM (IT service market) areas like human resource and security solutions by launching new products and services.
The company has an expected earnings growth rate of 27.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 5.5% over the past 30 days.
Synopsys Inc. SNPS is a leading vendor of electronic design automation software offering a full suite of products used in the logic synthesis and functional verification phases of chip design, including a broad array of reusable design building blocks.
The company has an expected earnings growth rate of 15.6% for the current year (ending October 2020). The Zacks Consensus Estimate for the current year has improved by 1.2% over the past 30 days.
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