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Tech Sector Provides Solid Returns YTD: Will the Rally Last?

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  • ADBE
  • AVGO

Wall Street has performed reasonably well so far this year despite facing the worst September in a decade. Year to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have provided more than 13% returns. We have already entered the fourth quarter and it appears that this momentum will be maintained for the rest of the year, notwithstanding October’s historically recognized fluctuating trade pattern.

Wall Street has maintained its impressive northbound journey after completing an astonishing bull run in the coronavirus-ridden 2020. However, the U.S. stock market’s driver has changed.

In 2020, the technology sector drove Wall Street to get rid of the pandemic-led historically shortest bear market and formed a new bull market. In 2021, the cyclical sectors like financials, industrials, energy, materials and consumer discretionary took center stage.

However, a closer look at the U.S. stock markets reveals that the technology sector has performed fairly well in 2021. At present, the Technology Select Sector SPDR (XLK) — one of the 11 broad sectors of the market’s benchmark the S&P 500 Index — has gained mostly in line with the benchmark itself.

Year to date, the performance of the technology sector is well above several cyclical reopening sectors like consumer discretionary, industrials and materials. The tech rally is likely to continue going forward.

Tech Meltdown Temporary

The recent meltdown of the technology sector is a temporary phenomenon. The Fed has taken a $120 billion per month bond-buy program to ensure adequate liquidity in the system and tackle the pandemic-led economic devastations.

It was clear from the very beginning that the central bank will remove this stimulus gradually as the U.S economic recovery moves forward to a reasonably strong footing. The logic that the technology sector will underperform other cyclical sectors may be true for a short period of time but in the long term, technology stocks will remain the best bet.  

In fact, the fundamentals of the technology sector are rock solid. The growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, have given a boost to the overall space.

Tech Has Vast Potential — Buy on the Dip

The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data served most of their needs. Even those using smartphones, rarely utilize online digital features.   

However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to the digital platforms for their office work (work from home), ordering foods and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.

The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons to the other countries. Even those who are less inclined toward the digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now feeling the massive advantage of the online platforms.

The impact of a higher market interest rate is already factored in the technology sector’s valuation to a large extent. Share prices of several technology behemoths suffered a blow in September.

These companies have highly established business models spread across the world, strong product pipelines, globally acclaimed brand recognition and robust financial positions, which help them to cope with a higher interest rate. Investment in these stocks should be fruitful going forward.

Stocks in Focus

The technology sector is indispensable and the reopening of the U.S. and global economies will only act as a positive catalyst for this sector. At this stage, several stocks are available that looks attractive for future growth. However, picking them on the following three criteria will make the task easy.

First, select U.S. technology giants (market cap > $100 billion) that have strong growth potential for the rest of 2021. Second, these stocks have seen positive earnings estimate revisions within the last 90 days for the next one year. Third, these stocks have robust upside left reflected by a solid long-term (3-5 years) growth rate.

Eight stocks have fulfilled our selection criteria. These are: Microsoft Corp. MSFT, Texas Instruments Inc. TXN, NVIDIA Corp. NVDA, Adobe Inc. ADBE, Applied Materials Inc. AMAT, ServiceNow Inc. NOW, Broadcom Inc. AVGO and salesforce.com.inc. CRM.

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Texas Instruments Incorporated (TXN) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
salesforce.com, inc. (CRM) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Adobe Inc. (ADBE) : Free Stock Analysis Report
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
Broadcom Inc. (AVGO) : Free Stock Analysis Report
ServiceNow, Inc. (NOW) : Free Stock Analysis Report
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