Technology

Tech Sector Set to Push S&P 500 to Cross 3000 Mark: 5 Picks

The S&P 500 Index recorded a new all-time high of 2,933.68 on Apr 23. Notably, the broad-market index has seen an impressive turnaround of 16.8% year to date after finishing last year in the negative territory, with its worst-ever yearly performance since 2008.

The biggest catalyst for this rebound is the technology sector, which has rallied 27.3% year to date. And from  the eve of Christmas last year, when the benchmark index hit rock bottom, the sector has gained 36.8%.

At present, the S&P 500 is just around 2.5% away to reach the 3,000 level for the first time, which is likely to happen this year. Yet again, the technology sector set to act as the primary driver.

Market Contingent Upon U.S.-China Trade Deal

Wall Street’s performance in 2019 will largely depend on an amicable solution to the U.S.-China trade conflict. These two countries are reportedly entering into a bilateral trade agreement by late May or early June although no confirmation has come officially. However, it is beyond doubt that both sides are trying earnestly to solve a year-long tariff-related fights.

A trade deal between the United States and China is not only important from the point of view of these two countries, but also from a wider perspective as it will remove the biggest challenge to global economic growth. The IMF has clearly stated that primary reason of its pessimistic view on the global growth rate is this lingering trade-related conflict.

Technology Sector to Benefit Most

China is the largest trading partner of the United States. A strong economy in China, the largest market for high-tech products, will give U.S. technology companies a solid boost. Moreover, China 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, which pushed up prices of high-tech equipment and several electronics products.

An end to the U.S.-China trade spat is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, the repeal of tariffs on Chinese intermediary goods should 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 the homegrown tech behemoths.

Will the Rally be Broad-Based?

Despite a record-breaking performance by the S&P 500 this year, many industry watchers believe that this rally is associated with low volume especially since mid-March, questioning its sustainability. However, a more valid reason could be that investors were highly pessimistic about first-quarter 2019 earnings results.

Earnings results are better-than-expected so far. Total earnings for the S&P 500 Index are now expected to be down 2.3% from the same period last year on 4.7% higher revenues. This would be an improvement from an expected earnings decline of 3.9% estimated nearly a month ago. (Read More: Earnings Picture Good, Not Great)

Moreover, revenue growth is clearly indicating that aggregate demand of the economy is still growing albeit at a slow pace. Lower expected earnings decline and revenue growth may once again restore investors’ faith in risky assets like equities.

Our Top Picks

At this stage, it will be prudent to invest in technology stocks for solid gains. We have been able to narrow down our search on five stocks, which have moved higher in 2019 so far and still have upside left. 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.

CommScope Holding Co. Inc. COMM provides infrastructure solutions for communication networks worldwide. The stock has surged 60.9% year to date. The company has an expected earnings growth rate of 22.7% for the current year. The Zacks Consensus Estimate for the current year has improved 30.4% over the last 60 days.

Alteryx Inc. AYX operates a self-service data analytics software platform that enables organizations to enhance business outcomes and the productivity of their business analysts, data scientists, and citizen data scientists worldwide. The stock has surged 45.4% year to date. The company has an expected earnings growth rate of 2,100% for the current year. The Zacks Consensus Estimate for the current year has  improved 400% over the last 60 days.

Ceridian HCM Holding Inc. CDAY operates as a human capital management software company in the United States and internationally. The stock has surged 50.4% year to date. The company has an expected earnings growth rate of 980% for the current year. The Zacks Consensus Estimate for the current year has improved 2.3% over the last 60 days.

Guidewire Software Inc. GWRE provides software products for property and casualty insurers worldwide. The stock has rallied 30.8% year to date. The company has an expected earnings growth rate of 21.1% for the current year. The Zacks Consensus Estimate for the current year has improved 6.2% over the last 60 days.

PTC Inc. PTC operates as software and services company in Americas, Europe, and the Asia Pacific. The stock has surged 22.9% year to date. The company has an expected earnings growth rate of 24.8% for the current year. The Zacks Consensus Estimate for the current year has improved 0.6% over the last 60 days.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.