After suffering for most of 2013, the technology sector made a strong comeback in 2014 with substantial improvement in earnings and revenue growth rates as well as beat ratios. The momentum continued even this year with the Technology sector posting the second best revenue growth (7.4%) in the Q1 season, per Zacks Earnings Trend.
While most of the credit for the Tech sector outperformance goes to Apple, we cannot rule out the underlying momentum. Most tech-biggies have considerable international exposure and thus saw their results being hurt by a stronger dollar in Q1. And as the greenback plunged to a multi-month low against a basket of currencies lately, we should not see steep adverse currency translation in Q2.
So far, the overall technology sector has delivered an earnings beat ratio of 49% and revenue beat ratio of 43.1%. Technology was the biggest contributor to the S&P 500 in terms of market cap, with the sector’s total earnings growing 6.8% (including Apple’s strong performance).
Barring Apple, earnings growth for the sector drops to a decline of 2.4%. Yet the sector should stand to gain from recovery in fundamentals globally. Also, decent IT investment across the globe will likely lend a hand to the sector. Most of the tech giants are cash-rich and thus in a position to maximize shareholder value. As per Fidelity’s Q2 sector scorecard (which considers the factors like business cycle, fundamentals, relative valuations, momentum, and relative strength), Technology still overrules others.