The technology sector has been the best-performing sector this year with the ultra-popular Select Sector SPDR Technology ETF (XLK – Free Report) gaining 26.2% in the year-to-date time frame versus the gain of 15.7% for SPDR S&P 500 (SPY- Free Report) .
The outperformance came on the back of soaring FAANG stocks — Facebook (FB – Free Report) , Amazon (AMZN – Free Report) , Apple (AAPL – Free Report) , Netflix (NFLX – Free Report) , and Alphabet (GOOGL – Free Report) . The emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones and virtual reality devices as well as strong corporate earnings are acting as key catalysts.
With the global economy gathering strong momentum, technology stocks will continue to outperform and are less susceptible to interest rates or deregulation. The twin tailwinds of Trump’s tax reform plan and a rising interest rate scenario are driving the stocks higher. This is because the tech titans hoard huge cash overseas and are poised to benefit the most from Trump’s proposed tax reform policy. In fact, the top five U.S. hoarders are Apple, Microsoft (MSFT – Free Report) , Alphabet, Cisco (CSCO – Free Report) and Oracle (ORCL – Free Report) that hold 88% of their money overseas, according to Moody’s.
Further, most of the tech companies are sitting on a huge cash pile and are in a position to increase payouts to their shareholders. The cash reserves will ensure that these companies are not plagued by financial trouble in a rising interest rate environment. Adding to the strength is a pick-up in the economy and better job prospects that are giving a solid boost to economically sensitive growth sectors like technology, which typically perform well in a maturing economic cycle.
If this wasn’t enough, tech is one of the leading sectors of the S&P 500’s profit growth resurgence. The sector is expected to post earnings growth of 9.2% for this year, reflecting a remarkable markup from 1.7% growth reported in 2016.
