Wall Street is continuing its dream run in 2019 despite a sudden collapse of trade negotiations between the United States and China. What is more important is that the primary driving force of the market’s bull run is the technology sector, which was likely to be affected the most by lingering tariff-related conflicts.
The technology sector is likely to benefit as U.S.-China trade talk is likely to resume although an amicable deal is nowhere to be seen. However, both sides have decided to come down from their rigid positions and offer some concessions to each other.
Technology Sector Soaring in 2019
The technology sector carries the highest weightage (20.1%) within the 11 sectors of the broad-market S&P 500 Index. Technology stocks suffered a severe setback in 2018 and Technology Select Sector SPDR (XLK) declined 2.9%. The tech-laden Nasdaq Composite had plunged 3.9% last year.
However, in 2019, XLK is the best performer of the S&P 500, gaining a massive 31.7%, well above the benchmark index’s gain of 19.9%. Notably, on Jul 23, the XLK touched its all-time high level of 82.15 before finishing at 82.07. The XLK has gained 4.6% so far in July. Moreover, the tech-heavy Nasdaq Composite is also up 24.4% year to date.
Within the technology sector, the performance of semiconductors is worth mentioning as the industry had a rough 2018. The Philadelphia Semiconductor Index (SOX) was down 2.6% last year. However, the SOX has advanced an astonishing 35.2% year to date and 7.2% so far in July.
U.S.-China Trade Negotiations to Restart
After the abrupt breakdown of U.S.-China trade talk in May, the two sides have decided to renegotiate from July. Following the successful conclusion of initial telephonic conversations between the two countries, a high level U.S. trade delegation headed by Trade Representative Robert Lighthizer will visit China later this week.
Meanwhile, the U.S. government has decided to relax some restrictions imposed on the Chinese tech behemoth Huawei Technologies. Several U.S. tech companies will be given licenses to sell products to Huawei.
Notably, in May, the Trump administration blacklisted Huawei and refrained it from doing any sort of business with U.S. corporates on national security concerns. On the other hand, China has decided to significantly increase imports of U.S. agricultural products, especially soya bean.
Why Trade Solution is Important for Tech Sector
China is the largest trading partner of the United States. A trade spat with the United States resulted in significant slowdown of the Chinese economy. However, a strong Chinese economy will give U.S. technology companies a solid boost as China is the largest market for high-tech products.
On the other hand, China also 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 as it raised prices of high-tech equipment and several electronics products.
At this juncture, an amicable solution to the U.S.–-China trade war is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. tech giants.
Our Top Picks
At this stage, it will be prudent to invest in technology stocks with a favorable Zacks Rank. We have narrowed down our search to six such tech stocks that have popped in the past three months despite facing trade-induced market volatility. Each of these stocks carries a Zacks Rank #2 (Buy) and has a positive Earnings ESP.
Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are expected to jump on their earnings release irrespective of already solid gains year to date.
[READ NEXT] – 5G Stocks are About to get Red Hot
PayPal Holdings Inc. PYPL is a technology platform company offering online payment solution that allows customers to pay and get paid, withdraw funds to their bank accounts and hold balances in their PayPal accounts in various currencies.
PayPal Holdings has an Earnings ESP of +11.19% for the current quarter. The company has an expected earnings growth rate of 29.3% and 25.2% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current quarter and year improved 8.7% and 1.7%, respectively, over the last 60 days.
The company delivered positive earnings surprise in the last four quarters with an average beat of 7.6%. The stock has climbed 9.1% in the past three months. PayPal Holdings is expected to release earnings results on Jul 24, after the closing bell.
CGI Inc. GIB provides information technology (IT) and business process services in Canada, Northern Europe, France, the United States, the United Kingdom, Europe and the Asia Pacific. Its services include management of IT and business outsourcing, systems integration and consulting, and software solutions selling.
CGI has an Earnings ESP of +1.27% for the current quarter. The company has an expected earnings growth rate of 9.5% and 10.9% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current year improved 0.6% over the last 60 days.
The company delivered positive earnings surprise in three out of the last four quarters with an average beat of 0.3%. The stock has climbed 11.2% in the past three months. CGI is expected to release earnings results on Jul 31, before the opening bell.
Zendesk Inc. ZEN is a global software development company. It provides a software-as-a-service (SaaS) customer service platform. It offers applications that allow clients to manage incoming support requests from end customers from any Internet-connected computer.
Zendesk has an Earnings ESP of +7.84% for the current quarter. The company has an expected earnings growth rate of 66.7% and 27.3% for the current quarter and year, respectively.
The company delivered positive earnings surprise in three out of the last four quarters with an average beat of 141.7%. The stock has advanced 8.4% in the past three months. Zendesk is expected to release earnings results on Jul 30, after the closing bell.
Vonage Holdings Corp. VG provides consumers and small businesses worldwide an affordable alternative to traditional telephone service through cloud communications. It operates through two segments, Business and Consumer.
Vonage Holdings has an Earnings ESP of +47.37% for the current quarter. The company delivered positive earnings surprise in three out of the last four quarters with an average beat of 41.7%. The stock has jumped 29.8% in the past three months. Vonage Holdings is expected to release earnings results on Aug 6, before the opening bell.
Asure Software Inc. ASUR provides cloud-based human capital management and workspace management solutions worldwide. It offers Web-based workforce management solutions that enable organizations to manage their office environment, as well as their human resource and payroll processes.
Asure Software has an Earnings ESP of +8.11% for the current quarter. The company has an expected earnings growth rate of 5.5% for the current year. It delivered positive earnings surprise in three out of the last four quarters with an average beat of 29.5%. The stock has jumped 32.9% in the past three months. Asure Software is expected to release earnings results on Aug 14.
Cisco Systems Inc. CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry worldwide. It offers switching products, routing products that interconnect public and private wireline and mobile networks, data center products and wireless access points for use in voice, video and data applications.
Cisco Systems has an Earnings ESP of +1.53% for the current quarter. The company has an expected earnings growth rate of 17.1% and 18.5% for the current quarter and year, respectively.
The company delivered positive earnings surprise in the last four quarters with an average beat of 2.1%. The stock has gained 2.5% in the past three months. PayPal Holdings is expected to release earnings on Aug 14, before the opening bell.
