Mar 26 was quite a breather for Wall Street after two chaotic trading sessions. Concerns about global economic slowdown and the Fed’s extra cautious monetary stance compelled investors to sell risky assets like equities and opt for safe-haven government bonds. This resulted in yield inversion between 3-month and 10-year US Treasury Notes, raising concerns of an impending recession in the U.S. economy.
Partial inversion of the Treasury yield curve may be a pure technical issue triggered by serious growth concerns in China, Japan and the Eurozone. However, fundamentals of the U.S. economy remain strong despite Wall Street entering the 11th year of expansion this month. The U.S. economy will continue to grow albeit at a slow pace.
Immediate Recessionary Concerns Overblown
On Mar 22, yield on 3-month US Treasury Note surged ahead of 10-year US Treasury Notes. Yield curve inversion generally implies market’s diminishing expectations about future economic growth and an indication of an imminent recession.
However, an inverted yield curve does not indicate immediate recession. It may come about after a year or two or even later. A survey by research firm Credit Suisse shows that historically, U.S. stocks rose 15% on average in the 18 months following yield inversions. The study also revealed that it took nearly 24 months for the stock market to enter recession after yield curve inversion.
Despite the yield inversion between 3-month and 10-year US Treasury Notes, the yield curve between 2-year Treasury Note and 10-year Treasury Note is upward sloping. Several economists consider this yield curve as a more powerful indicator of recession.
Why Tech Stocks?
The technology sector carries the highest weightage (20.1%) within the 11 sectors of the broad-market S&P 500 index. This sector suffered a severe setback in 2018. However, this year, Technology Select Sector SPDR (XLK) has been the best performer of the S&P 500, gaining more than 18.4%. The tech-laden Nasdaq Composite is also up a little more than 15.9%.
This sector is benefiting from continued strong digital transformation. The last few years witnessed a series of breakthroughs in predictive analysis, artificial intelligence (AI), self-driving vehicles 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.
Tech Sector to Gain Most From a Possible Trade Truce
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. Meanwhile, China plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries.
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.
Our Top Picks
At this stage, it will be lucrative to invest in tech stocks. We have been able to narrow down our search to five stocks, which have moved higher and still hold potential to 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 38.4% year to date. The company has an expected earnings growth rate of 29.1% for the current year. The Zacks Consensus Estimate for current-year earnings has risen 5.9% over the past 60 days.
Plantronics Inc. PLT designs, manufactures, and markets lightweight communications headsets, telephone headset systems, other communication endpoints, and accessories for the business and consumer markets under the Plantronics brand worldwide. The stock has surged 36% year to date. The company has an expected earnings growth rate of 35.1% for the current year. The Zacks Consensus Estimate for the same has improved 13.6% over the past 60 days.
Ubiquiti Networks Inc. UBNT is engaged in the designing, manufacturing and selling broadband wireless solutions worldwide. The stock has risen 46.1% year to date. The company has an expected earnings growth rate of 26.3% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 13.1% up over the past 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 47% year to date. The company has an expected earnings growth rate of 16.3% for the current year. The Zacks Consensus Estimate for the same has moved 3.7% north over the past 60 days.
Mercury Systems Inc. MRCY is a commercial provider of secure sensor and mission processing subsystems for defense and intelligence programs. The stock has advanced 31.7% year to date. The company has an expected earnings growth rate of 25.4% for the current year. The Zacks Consensus Estimate for current-year earnings has climbed 1.7% over the past 60 days.
Today's Best Stocks from Zacks
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