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Here's why the technology sector is so levered to U.S.-China trade tensions

Scott Gamm

Trade tensions between the U.S. and China are heating up and the market’s hottest sector happens to be highly levered to such fears.

That is, the technology sector, which is the market’s best performing sector year-to-date: rising 27%, trouncing the S&P 500’s (^GSPC) 17.5% rise.

“Tech is one of the few S&P sectors with +50% non-U.S. revenues and profits,” wrote Nick Colas, co-founder of DataTrek Research, in a note to clients. “The exact number is 58% non-U.S. sales, the highest of any industry group. That makes it the poster child for international trade, and not just with China. Markets were hoping that a calm resolution to U.S.-China trade disputes would pave the way for other agreements.”

The tensions ratcheted up when President Trump tweeted Sunday that the 10% tariffs on $200 billion worth of goods from China would increase to 25% on Friday as trade talks have been moving too slowly.

Specialist John Alatzas, left, and trader Michael Milano work on the floor of the New York Stock Exchange, Wednesday, May 1, 2019. Stocks are opening higher on Wall Street after several big U.S. companies reported earnings that were better than analysts were expecting. (AP Photo/Richard Drew)

It’s no surprise that tech was one of the harder hit sectors in early trading Monday.

Remember, the tech sector excludes Facebook (FB) and Alphabet (GOOGL), which happen to be banned in China. Those stocks are included in the Communication Services Sector. Amazon (AMZN) is also excluded from the technology sector. It’s in Consumer Discretionary instead.

What is included in the tech sector are Apple (AAPL) and Microsoft (MSFT), which have plenty of exposure to China, as Colas points out. These companies hit a trillion dollars in market cap in recent weeks.

“At a 21.7% weighting in the S&P 500, Tech’s premium earnings multiple of 19.3x forward earnings was an outsized reason U.S. stocks sported a 16.8x earnings multiple on Friday evening,” Colas noted.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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