An Example of How In-depth Analysis Can Paint a Different Picture

An Example of How In-depth Analysis Can Paint a Different Picture

In-depth analysis can reveal that a sector may not be as bearish as it is portrayed. Goldman considers the tech sector as an example.   

In stock trading and investing, you sometimes need to go beyond what the general investor consensus is. Perhaps things aren’t how they are perceived to be. The tech stocks are probably in that category.

Are tech stocks still attractive options? Investors have sold tech stocks, concerned about the outlook of the sector. Goldman Sachs analysts, however, still find the sector attractive. Sachs believes that with the US economy gradually decelerating from its present 4% pace, investors must keep rewarding secular growth.

Tech Sector Not as Overcrowded as Perceived

Despite the fact that valuations in the tech sector are close to cycle highs, they’re quite low in the perspective of long-term history. Goldman doesn’t regard tech stock investments to be overcrowded dangerously. Though the tech sector remains the favorite for mutual funds and hedge funds, the position filings in the first quarter revealed that sector tilts have gotten smaller than they were back in 2016 and 2017.

Narrow Breadth of Market Undeniable

It is clear that the breadth of the market has been quite narrow thus far in 2018. Just 10 stocks contributed to 62% of the S&P 500 Index (SPX) returns in total, including dividends. 7 of these stocks come under the technology sector, if you exclude Netflix ($NFLX) and Amazon ($AMZN) that some investors classify among consumer discretionary stocks.

The S&P 500 Can Rebound Soon

One of the other observations made by Goldman Sachs is that even when the S&P 500 provides pretty low overall returns, it doesn’t take many stocks to get the index lifted by a tiny amount. Goldman analysts note that the tech sector, including Netflix and Amazon, has been able to deliver 76% of the S&P 500 year-to-date total return. In 2018, for the tech sector, Goldman has a projection of 19% EPS growth against the consensus estimates of 21%, while for 2019 Goldman has an 11% EPS growth prediction against the consensus estimates of 9%.

The disappointing earnings report of Facebook ($FB) caused the Nasdaq 100, representing the big tech stocks, to fall again on Monday, July 30, 2018, the third straight day of falling. However, the index then rebounded on Tuesday, July 31.

Returns Are Well Above Warning Levels

Goldman analysts point out that though the market’s narrow breadth has historically indicated below-average returns, they are currently well above levels that were historically considered as warning signs. In the past, at least since 1990, we’ve seen that economic slowdowns are usually preceded by narrow bull markets. They were followed by significant market declines fueled by investors losing confidence in the crowded market leaders.

Goldman Considers 2018 to Be Different to the Past

However, Goldman regards 2018 as different. During those time periods of concentrated market leadership mentioned above, Goldman says that there was also an increase in earnings concentration. However, in the current scenario, the earnings environment seems to be quite broad-based. There’s data to back this up. The S&P 500’s consensus EPS growth projection for 2019 stands at 9%, with the projection for the S&P 500 median stock being 10%. Here’s a look at the top 10 tech stocks according to this table from Goldman Sachs mentioned in Investopedia:

StockTicker% of S&P% of S&P YTD Return
Amazon.com Inc.AMZN

 

3%15%
Microsoft Corp.MSFT

 

4%12%
Alphabet Inc.GOOGL 

 

3%8%
Apple Inc.AAPL

 

4%8%
Netflix Inc.NFLX 

 

1%4%
Mastercard Inc.MA 

 

1%3%
Visa Inc.V

 

1%3%
Adobe Systems Inc.ADBE

 

1%3%
Boeing Co.BA

 

1%2%
Nvidia Corp.NVDA 

 

1%2%
Total For Top 1018%62%

As you’ve seen, these stocks generate around 20% of the total earnings of the S&P 500. That would be comparable with recent years, while being just below the last 30 years’ 21% average.

S&P 500 Companies Defeated Consensus Estimates

At the time of Goldman bringing out this Weekly Kickstart report, half the companies making up the S&P 500 had reported Q2 earnings. 60% of these defeated consensus estimates by one standard deviation at least. 79% of those that have reported, at the time of the Goldman article, have managed to beat earnings estimates. 89% of these tech companies have managed to surprise positively in Q2 earnings. 71% of them have surprised in terms of one or more standard deviations. Goldman notes that the tax reform has been a major factor in the earnings rise.

Despite Facebook’s Shares Sinking, All Is Not Gloomy in S&P 500

Goldman also points out that Facebook’s ($FB) shares had sunk by 19% on July 26 after an earnings report that was quite discouraging. However, on that very day, the remaining part of the S&P 500 could rise by 10 basis points. There were gains in 7 out of the 11 sectors in the S&P. Alphabet ($GOOG, $GOOGL), a FANG member like Facebook, had its stock rise to the tune of 75 basis points. That’s evidence of the market’s resilience.

Seeing things in this perspective shows the tech sector is still attractive and not as bad as it seems. Trade all of these stocks, both long and short, commission free with TradeZero.

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Tradezero

TradeZero is an online broker dealer that offers commission free trading of the US equity markets, US equity and index options trading. Its clients receive up to 6 to 1 intraday leverage and the ability to trade the US markets without any pattern day trading rules. TradeZero clients have access to a variety of cutting edge trading platforms which include real-time streaming market data.

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