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How the Tech Sector Could Drive the Market's Performance in 2017

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How the Tech Sector Could Drive the Market's Performance in 2017 PART 1 OF 4

How the Technology Sector Performed in 1Q17

Improved technology sector performance

In a recent interview on Wall Street Week on March 17, 2017, CFRA Research’s chief investment strategist, Sam Stovall, and Nuveen’s chief equity strategist, Bob Doll, discussed the value of technology stocks in investment portfolios.

Stovall and Doll shared their favorite stock picks for 2017. They also talked about the initial public offering (or IPO) activity in the technology sector, some reasons for low activity in the current scenario, and their expectations for 2017.

How the Technology Sector Performed in 1Q17

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Technology sector performance in 1Q17

The technology sector’s growth has mostly been driven by consumers from others sectors, as they depend on technology to facilitate their smooth functioning. The technology sector tends to be volatile, and its price movements may seem extreme to the overall market. If the broader market rises, technology stocks can rise sharply, and vice versa.

The Technology Select Sector SPDR ETF (XLK) and the Vanguard Information Technology ETF (VGT) are among the top technology ETFs in the United States. The technology sector performed well in 2016, with XLK posting gains of ~15.6%. The S&P 500 Index (SPX-INDEX) rose ~10% in the year.

Since the US presidential election, technology stocks have continued to surge in 2017. XLK posted a rise of ~10% in 1Q17. The SPDR S&P 500 ETF (SPY), which tracks the most popular US index, the S&P 500, posted a rise of ~6% during the same period.

Why technology stocks are surging in 2017

According to Doll, over the years, technology stocks has provided a powerful growth story due to the following factors:

  • strong balance sheets
  • huge free cash flows
  • biggest benefits from the repatriation of cash from overseas amid US tax reforms

According to Stovall, the technology sector’s earnings growth is supporting the surge in technology stocks. The S&P 500 technology sector earnings growth was ~10% in 4Q16, in line with Capital IQ’s forecast for earnings growth of ~10.3% for the sector in 2017.

Another reason for the technology sector’s outperforming the overall market: a few heavyweight stocks’ disproportionately leading the indexes. The top-weighted stocks in XLK include Apple (AAPL), Microsoft (MSFT), Facebook (FB), and AT&T (T). These stocks constitute ~37% of the ETF.

In the next article, let’s look at the performances of technology stocks in detail.

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