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The Technology Sector Won’t Give Up Its Dominance

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The markets continued their relentless march upward on Wednesday. The S&P 500 finished 0.5% higher, the Dow Jones Industrial Average was a touch better at 0.52%, the Russell 2000 index of small-cap stocks finished ahead by 0.54% and the Nasdaq Composite led the way, up 0.64%.

In the aftermath of the presidential election in November 2016, the information technology (IT) sector - a sector that had been flying high during the latter half of 2016 - stumbled. As traders scrambled to move money into the financial, basic materials and industrial sectors to take advantage of President Donald Trump's promised tax cuts, regulatory reforms and infrastructure spending, they pulled money out of IT stocks, thinking their bullish run was over.

How wrong they were!

After the sector's temporary stumble in mid-November, IT stocks - such as Apple Inc. (NASDAQ: AAPL ), Microsoft Corporation (NASDAQ: MSFT ) and Facebook Inc (NASDAQ: FB ) - regained their footing and have been driving the market higher ever since, as you can see in the Technology Select Sector SPDR ETF (NYSEARCA: XLK ).

Fig. 1 - Daily Chart of the Technology Select Sector SPDR ETF (XLK)

The IT sector owes its current success to three primary factors: strong earnings growth, a bullish outlook and a stabilizing global economy.

Strong earnings growth has dominated the narrative surrounding the IT sector this earnings season. According to FactSet, the IT sector leads the way in earnings numbers that came in above the consensus estimate in the fourth quarter of 2016, with a whopping 87% of companies beating expectations (see Fig. 2).

Fig. 2 - S&P 500 Earnings Above, In-Line, Below Estimates: Q4 2016

The companies in the IT sector then kept the bullish ball rolling by providing more positive guidance for the future than any other sector, with 48% of companies issuing positive guidance (see Fig. 3).

Fig. 3 - Percentage of S&P 500 Companies with Q1 Positive & Negative Guidance

One of the reasons for this positive guidance is the bullish recovery not only of the U.S. economy but also of the global economy in general. The European Union (EU) upgraded its Winter 2017 Economic Forecast for the region on Monday, China reported stronger-than-expected gross domestic product (GDP) numbers last month and emerging-market economies are starting to thrive once more as commodity prices rebound.

This global recovery is especially poignant for the IT sector, as it derives a larger percentage of its revenue from international sources than any other sector (see Fig. 4).

Fig. 4 - S&P 500: Aggregate Sector Geographic Revenue Exposure (%)

As the U.S. stock market continues to press on to all-time high after all-time high, look for the IT sector to remain a driving force as companies become increasingly reliant on their technology infrastructure and consumers continue their shift to a mobile, interconnected world.

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

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InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader , a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here .

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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.


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

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