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Could Earnings Season Save the Tech Sector from Turbulence?

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Direxion

Technology stocks whip around

After an incredibly smooth ride last year, technology and semiconductor stocks are encountering a lot of turbulence this year. The S&P 500 Information Technology GICS Index is still up 3.5% this year, and the Philadelphia Semiconductor Index is still up 5%, but there have been bumps. Obviously, we can point to tariffs, the aftermath of the tax bill, and expensive stocks at highs in January. But the real bumps have been caused by the FAANG names. The NYSE Fang+ Index is still up almost 12% this year, but the recent peak-to-trough drop was almost 17%!

Facebook has faced its share of problems. The Cambridge Analytical scandal led to an overall data privacy issue. Google got tarred with the same scandal even without the direct problems Facebook saw. Amazon has been under attack all year from the president on tax avoidance and paying too little to the post office. Apple just seems to be in a cycle lull. Finally, Netflix looks amazing, up 60% this year.

Will earnings help this group out? It seems a little less clear with this group, as some of the issues with Facebook, Amazon, and Apple are more company-specific. As an overall group, technology names aren’t that expensive—at 17.6x estimated 2018 earnings—and semis are even cheaper at 14x estimated 2018 earnings. Remember: these are generally the innovators in the marketplace, and they often grow faster and are more expensive. The question with semis now shifts to whether we’re at a peak that plays out over the year. They often start to discount earnings woes well ahead of time.

So this sector has a lot going for it and against it—hence the volatility. TECL (3x Bull) has you covered if you like these trends, and TECS (3x Bear) is your tool if you’re concerned about the sector. Note semiconductors’ massive outperformance at some periods in the last couple of months below.

Past performance is not indicative of future results. For standardized performance of TECL and SOXL please go to http://www.direxioninvestments.com/products/direxion-daily-technology-bull-3x-etf or http://www.direxioninvestments.com/products/direxion-daily-semiconductor-bull-3x-etf.

Market Realist

Tech sector in for a wild ride after a high run in 2017?

The technology sector has always been investors’ favorite. Consisting of innovative companies with a strong hold, this sector has benefitted the most last year. The technology sector gained 37% in 2017 while the semiconductor industry was up 36%. The tech sector sell-off in February affected the performance of the S&P 500, as the sector holds the highest weighting and remains highly correlated with the S&P 500.

The most popular stocks in the sector are collectively called FAANG—Facebook (FB), Apple, Amazon, Netflix, and Alphabet (GOOGL). They drive the overall sector’s performance.

Facebook stock took a hit after the Cambridge Analytica scandal last month. The scandal took a toll on the overall sector with expectations of tighter regulations. Amazon was affected after President Trump kept criticizing the company in his tweets. The chart below shows the performance of FAANG stocks in 2017 in 2018 year-to-date. Despite the March rout, Netflix and Amazon’s stock gained a whopping 71% and 31%, respectively. The tech-heavy NASDAQ Composite Index is up 3.5% YTD.

Could earnings season benefit the tech sector?

As per a Factset report on April 20, with 17% of companies having reported earnings for 1Q18, the information technology sector has reported the fourth-highest year-over-year earnings growth of 22.0%. For 1Q18, five of the seven industries in this sector are expected to report double-digit earnings growth.

Alphabet (GOOGL) has already reported 28% Y0Y (year-over-year) growth in earnings for its 1Q18. Apple (AAPL) reported 16% earnings growth. Amazon is expected to report a decline of 14% in earnings in 1Q18. However, analysts expect its earnings to increase 84% for 2018 overall. Netflix recorded 60% YoY growth in earnings in 1Q18. Facebook is expected to report 4% growth in earnings in 1Q18. Earnings season could be a catalyst for the sector.

The downside for this sector is that tech companies face constant pressure to focus on product innovation. Nevertheless, whether or not this earnings season could control the turbulence tech stocks experienced, investors have a choice with Direxion’s Daily Technology 3X Bull (TECL) and Direxion’s Daily Semiconductor 3X Bull (SOXL) or the Daily Technology 3X Bear (TECS) and Daily Semiconductor 3X Bear (SOXS).

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