Tech Stocks Ignite Market Rally

Technology stocks fired up investors today, with Warren Buffett striking the match.

The three main indices exploded higher on Friday, fueled by a surge in the tech sector. S&P 500 earnings showed continued strength and new economic data eased fears of inflation.

“FAANG” stocks posted solid gains today, in the wake of blowout operating results. Apple (NSDQ: AAPL) outpaced the five-stock coterie, with a jump of 3.92% to hit an all-time high. Apple was boosted by a report Thursday night that Buffett’s Berkshire Hathaway (NYSE: BR.K) had acquired 75 million additional shares of AAPL in the first quarter. Berkshire’s annual shareholders meeting starts tomorrow. 

Despite the dangers that currently bedevil stocks, money-making opportunities still abound. The key for long-term survival as an investor is to focus on quality companies that are tapped into unstoppable macro-trends. Hence the Oracle of Omaha’s bigger bet on Apple.

Friday also brought encouraging news on the employment situation. The U.S. Labor Department reported that non-farm payrolls grew by a healthy 164,000 jobs in April. The unemployment rate dropped to 3.9%, a level last seen in December 2000. Wages only slightly rose last month, which assuaged worries that inflationary pressures are building too quickly.

Meanwhile, trade talks in Beijing between the U.S. and China ended today. The supposed negotiations produced exactly what I predicted they would: bupkis. A statement released this morning from China’s state-run media emphasized that disagreements over trade remain “relatively big.” The good news is that Wall Street wasn’t expecting much from this trade junket anyway.

The U.S. trade delegation arrived in China on Thursday and promptly left on Friday, which begs the question: why did they go at all? Perhaps they needed frequent flier miles.

Reliable tailwinds…

The threat of trade war continues to loom over stocks. Another round of tit-for-tat tariffs could easily tank the markets. But amid these tumultuous conditions, two interrelated sectors enjoy sustainable momentum: technology and aerospace/defense.

The players in aerospace/defense straddle more than one sector. The manufacture of war-making machines requires industrial might and the latest technology. First-quarter report cards in these two sectors have been beating expectations on the top and bottom lines.

Analysts estimate that so far, the year-over-year blended earnings growth rate for S&P 500 companies has come in at more than 25%. Before the earnings season got underway, the consensus expected lower growth of 18.3%. The health care (96%) and technology (91%) sectors have the highest percentages of companies reporting earnings above estimates.

In the technology sector, Alphabet (NSDQ: GOOG) and Facebook (NSDQ: FB) have reported the largest upside differences between actual earnings per share (EPS) and estimated EPS ($13.33 versus $9.28 and $1.69 vs. $1.35, respectively).

One of the strongest performing stocks in the Dow has been aerospace/defense behemoth Boeing (NYSE: BA). The plane maker posted first-quarter EPS of $3.64 compared to $2.58 forecasted by analysts, as commercial and military orders hit new records.

This upward trajectory of earnings means that we have more room to run in technology and aerospace/defense stocks, even as the market as a whole remains volatile. Adding impetus to this growth is the massive tax cut bill passed in December.

The tax cuts already are boosting merger and acquisition (M&A) activity in the technology sector. According to the latest figures released this week from Thomson Reuters, worldwide M&A totals $1.7 trillion, up 64% compared to year-to-date 2017. Technology, media and telecom M&A nearly tripled compared to a year ago, with $420.6 billion in deals announced.

Keep an eye on Silicon Valley giants with deep pockets. They increasingly need to find new avenues of growth by gobbling up smaller, entrepreneurial firms in such hot areas as autonomous cars, artificial intelligence, machine-to-machine learning, the Internet of Things, virtual/augmented reality, and the cloud.

You may think that the majority of tech stocks are overvalued, but that’s not so. A closer examination of the tech sector reveals that it has become a bifurcated market, with a highly visible minority of Wall Street darlings trading at high multiples, while less-loved but intrinsically strong stocks get short shrift.

Underappreciated tech niches stand out. Notably, electronics is a booming, high-margin business with a broad range of applications across industries, especially in aerospace/defense.

Aerospace/defense and its related sector of technology were stars in 2017, outperforming the S&P 500. They continue to outperform.

The Technology Select SPDR (XLK) and the SPDR S&P Aerospace and Defense ETF (XAR) have racked up total returns year to date of 2.62% and 4.11% respectively, compared to -1.00% for the SPDR S&P 500 ETF (SPY).

These twin sectors should continue to beat the broader market, as a copiously funded Pentagon increasingly demands breakthrough technologies. And while geopolitical risk rattles the broader market, it boosts the fortunes of defense contractors and their technology suppliers.

Friday Market Wrap

  • DJIA: +1.39% or +332.36 points to close at 24,262.51
  • S&P 500: +1.28% or +33.69 points to close at 2,663.42
  • Nasdaq: +1.71% or +121.47 points to close at 7,209.62

Friday’s Big Gainers

  • Medifast (NYSE: MED) +22.30%

Wellness retailer beats on earnings and revenue.

  • Shake Shack (NYSE: SHAK) +18.03%

Restaurant chain beats on earnings.

  • Titan International (NYSE: TWI) +16.97%

Vehicle component maker reports robust earnings.

Friday’s Big Losers

  • Fluor (NYSE: FLR) -22.44%

Construction giant posts surprising earnings loss.

  • Performant Financial (NSDQ: PFMT) -13.92%

Analysts bearish on financial services provider.

  • Gogo (NSDQ: GOGO) -13.14%

Broadband provider’s earnings fail to impress.

Letters to the Editor

“What’s a good hedge now against rising risk?” — Daniel H.

If you don’t have precious metals in your portfolio, you’re needlessly vulnerable to proliferating risks. Investors should buy these assets as protection now, before the herd bids up their prices.

Wall Street loved tax cuts, but it’s growing dubious over federal policies, especially deficit spending. A trade war is brewing, inflation is reemerging and valuations remain out of whack. The message is clear: you need precious metals in your portfolio as a hedge. The rule of thumb is 5%-10% of assets.

Looking for ways to protect your portfolio? I’m here to help:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

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