The tech-laden Nasdaq Composite has been making a steady climb throughout this year, establishing a new record high at the close of Jun 2 session. In fact, computer and software makers are having a ball, with the tech sector turning out to be the best performer over the past three months. Tech has come a long way, evolving from the dot-com catastrophe to becoming a safety trade and are now favored by active managers.
The Nasdaq 100 Index also made a lot of noise, whose combined value has swelled by $500 billion in the first quarter, the highest since the tech bubble peak in 2000. While tech companies being less sensitive to both taxes and interest rates bode well for them, one-time tax on trillions of dollars held overseas will provide a necessary windfall for such companies who have hoarded money outside the U.S.
Thus, when it comes to the equity markets, Silicon Valley is richer than ever and investing in Internet and technology companies makes all the more sense now. But, if their high valuations are a concern, trust their profits to rise higher in the days ahead.
Nasdaq Closes at Record High as Tech Leads Gains
The Nasdaq Composite registered its second successive high close on Jun 2, a jump that has resulted in a gain of 17.1% for the index this year outperforming both the S&P 500 and the Dow Jones Industrial Average.
It's been also a great year for the Nasdaq 100 index, which comprises about 58% of tech shares. The index is up 20.9% this year, pegged largely on the huge surge seen in a few big tech stocks. About 40% of the Nasdaq 100 is made up of the so-called "FANG" stocks and Microsoft, all of which has performed exceptionally well this year. In fact, returns of the FANG stocks alone account for more than a quarter of the S&P 500's advance this year.
If we consider the "FAANGtastic five" - Facebook Inc FB , Apple Inc. AAPL , Amazon.com, Inc. AMZN , Netflix, Inc. NFLX and Alphabet Inc GOOGL - each of them have gained between 25% and 34% this year. Amazon, in particular, topped the $1000-a-share level, highlighting the stellar show put up by tech stocks this year.
Investors Double Down on Tech Giants
Investors are doubling down on the hottest tech stocks this year, and it's paying off handsomely. Funds tracked by Bank of America Corp BAC own the highest percentage of tech stocks on record, after all the Technology Select Sector SPDR XLK leads the S&P 500 with nearly 18.3% gain this year.
According to Bank of America, active funds are now 71% overweight in FANG stocks after making the biggest move to growth from value since 2008. Tech focused mutual funds have enjoyed 12 weeks of inflows, while a survey by Bank of America saw that betting on tech-heavy Nasdaq was the most sought after in the markets. The "long Nasdaq" is the most popular trade, replacing the long U.S. dollar trade that had dominated the market for the last five months (read more: 'Long Nasdaq' Trade Swaps Bullish Dollar Trade: Top 5 Picks ).
Let us also not forget that around 52% of "large-cap" U.S. equity funds have outperformed their benchmarks this year, and tech has been one of the primary drivers of performance as pointed out by Goldman Sachs Group Inc GS . This also turned out to be the best rate of performance since 2009.
What's Driving Tech Stocks?
The tech-laden indices continue to scale to record highs this year on potential tax reforms and impressive first-quarter earnings. Investors are pouring money into Internet and tech companies, which are less vulnerable to tax cuts and changes in interest rates and are expected to benefit from lower corporate taxes, mainly on cash held overseas. Bringing back the tech companies massive overseas cash pile would let it do a combination of buybacks, dividends and M&A activities.
Tech companies already pay lower taxes compared to other companies due to a bigger share of overseas revenues. The effective tax rate of around 27% for tech companies trails only healthcare and real estate firms in the S&P 500. Tech firms were also hardly affected by changes in 10-year Treasury yields over the past three years as they haven't whipsawed over speculation about Fed's pace of tightening.
Many tech companies have, in fact, boosted their earnings without the help of government policies. Notably, Apple and Microsoft are riding high on growing demand for smartphones and web-based services. Total earnings in the first quarter for the tech companies in the S&P 500 cohort are up 17.1% from the same period last year on 6.9% higher revenues, with 79.7% beating EPS estimates and 78% surpassing revenue estimates. Tech companies are also expected to be big growth drivers in the second quarter (read more: Why Are Large-Cap Stocks Beating Small Caps? ).
Valuations, Bubble Not a Concern
The tech-powered rally has catapulted the sector to a price-to-earnings ratio that is four times the level in 2001. But, on a price-to-earnings basis, the sector is still below its 20-year average, as per MKM Partners.
Bank of America also stated that even if the valuation ratio of U.S. growth stocks dominated by tech to global value stocks surpassed its 2000 high, tech profits are expected to improve significantly. Jeremy Grantham, a famed value investor, added that this isn't a tech bubble as profitability has improved.
4 High-Flying Tech Stocks to Boost Your Portfolio
Investors, thus, should double down on the hottest tech stocks after they cross one record after another on favorable government policy and earnings strength. We have selected four such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of 'A' or 'B'. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Alphabet provides online advertising services in the U.S., the U.K., and rest of the world. The Google segment includes principal Internet products such as Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome, and Google Play. Alphabet has a Zacks Rank #2 and VGM score of 'B'.
The company's expected growth rate for the current year is 23.4%, higher than the Internet - Services industry's expected gain of 22.8%. The company has also outperformed the broader industry on a year-to-date basis (+25.6% vs +21.5%).
DXC Technology CompanyDXC provides information technology services. The company has a Zacks Rank #1 and VGM score of 'A'.
The company's expected growth rate for the current year is 116.9%, more than the Computers - IT Services industry's expected gain of 17.3%. The company has also outperformed the broader industry on a year-to-date basis (+30.5% vs +13.8%).
Fortinet IncFTNT provides cyber security solutions to a range of enterprises, service providers and government organizations across the world. Its network security solution consists of FortiGate physical, virtual machine and cloud platforms. Fortinet has a Zacks Rank #2 and VGM score of 'B'.
The company's expected growth rate for the current year is 56%, more than the Computer and Technology » Security industry's expected gain of 16.3%. The company has also outperformed the broader industry on a year-to-date basis (+29.6% vs +23.7%). You can see the complete list of today's Zacks #1 Rank stocks here.
xG Technology, Inc.XGTI is engaged in developing communications technologies for wireless networks. Its products include xMax system, an end-to-end Internet protocol (IP) network solution. The company has a Zacks Rank #2 and VGM score of 'B'.
The company's expected growth rate for the current year is 102.3%, higher than the Internet - Software and Services industry's expected gain of 14.9%. The company has also outperformed the broader industry on a year-to-date basis (+36.3% vs +29.5%).
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