On Mar 14, President Donald Trump said that the United States will probably get final information on a possible trade deal with China within the next three or four weeks. A deal between the two largest trading nations of the world will end a year-long bitter tariff war between them. Wall Street witnessed severe volatility throughout 2018 primarily owing to trade disputes. The technology sector was the worst sufferer of trade conflict and market volatility.
However, since the beginning of 2019, positive developments on the trade war front have reinstated a bull run on Wall Street, putting the spotlight, not so surprisingly, on the technology sector yet again. A final solution to the trade dispute will be major boon for the technology sector. Consequently, it will be prudent to invest in tech stocks with a favorable Zacks Rank and strong growth potential.
Technology Sector Soaring in 2019
The technology sector carries the highest weightage (20.1%) within the 11 sectors of the broad-market S&P 500 index. Technology stocks suffered a severe setback in 2018 and Technology Select Sector SPDR (XLK) declined 2.9%. The tech-laden Nasdaq Composite plunged 3.9% in 2018. However, in 2019, XLK is the best performer of the S&P 500, gaining more than 16.7%. The Nasdaq Composite is also up a little more than 15%.
Within the technology sector, the performance of semiconductors is worth mentioning as the industry had a rough 2018. The Philadelphia Semiconductor Index (SOX) was down 2.6% last year. However, the SOX has advanced 16.1% year to date.
Why Trade Solution is Important for Tech Sector?
China is the largest trading partner of the United States. A trade spat with the United States resulted in significant slowdown of the Chinese economy. However, a strong Chinese economy will give U.S. technology companies a solid boost as China is the largest market for high-tech products. Notably, the IMF has identified trade war as the primary factor for a perceived global economic slowdown in 2019.
On the other hand, China also plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries. In 2018, the Trump administration levied tariffs on Chinses imports worth $300 billion in two phases. Most of these products are from the high-tech industrial sectors. U.S. companies that rely on Chinese imports are unhappy about the move as it raised prices of high-tech equipment and several electronics products.
Most importantly, the major concern of the Trump administration was the intellectual property theft by Chinese companies in the guise of producing goods for the American tech giants. National security concerns lead to the imposition of tariffs.
At this juncture, an amicable solution to the U.S. – China trade war is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. tech giants. Moreover, clinching a lasting agreement with China, which will strictly protect U.S. intellectual properties, will be immensely beneficial for U.S. tech behemoths.
Other Positives for Tech Sector
The technology sector is benefiting from continued strong digital transformation. The last few years witnessed a series of breakthroughs in cloud computing, predictive analysis, artificial intelligence (AI), self-driving vehicles, digital personal assistants and Internet-of-Things (IoT), which have set the stage for robust growth. Research firm IDC estimates that worldwide technology spending on IoT will reach $1.2 trillion by 2022.
Out Top Picks
At this stage, it will be lucrative to invest in tech stocks to gain from a possible U.S. – China trade solution. We have been able to narrow down our search to five stocks, which have moved higher and still hold potential provide further upside. All five stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
SS&C Technologies Holdings Inc. SSNC provides software products and software-enabled services to financial services and healthcare industries in the United States, Canada, Mexico, Europe, the Asia Pacific, and Japan. The stock has surged 40% year to date. The company has an expected earnings growth rate of 30.5% for the current year. The Zacks Consensus Estimate for the current year has improved 7.3% over the last 60 days.
TESSCO Technologies Inc. TESS is a leading provider of services, products and solutions required to build, operate, maintain and use wireless voice, data, messaging, location tracking and Internet systems. The stock has gained 29.5% year to date. The company has an expected earnings growth rate of 38.2% for the current year. The Zacks Consensus Estimate for the current year has improved 22.6% over the last 60 days.
Xilinx Inc. XLNX designs and develops programmable devices and associated technologies worldwide. The stock has added 43.8% year to date. The company has expected earnings growth of 23.3% for the current year. The Zacks Consensus Estimate for the current year has improved 6.1% over the last 60 days.
Arista Networks Inc. ANET develops, markets, and sells cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. The stock has advanced 38.8% year to date. The company has an expected earnings growth rate of 16.5% for the current year. The Zacks Consensus Estimate for the current year has improved 3.7% over the last 60 days.
eGain Corp. EGAN operates as a software-as-a service provider of customer engagement solutions in the United States, the United Kingdom, India, and internationally. The stock has soared 68.8% year to date. The company has an expected earnings growth rate of 216.7% for the current year. The Zacks Consensus Estimate for the current year has improved 137.5% over the last 60 days.
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