Tech Stocks’ Crossroads: Trading Temptation and Trepidation
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Technology is the largest sector weight in the S&P 500® Index* as of November 2023, and more than half of the benchmark equity gauge’s top 10 holding are tech or tech-adjacent stocks. As a result, tech’s gyrations – positive and negative – have a way of impacting the broader market.
Translation: Rare are the occasions that tech swoons and diversified equity benchmarks trend higher. Year-to-date, tech is one of just three sectors in the green and the second-best performer behind only communication services. That sounds positive and it is, but recent action in the sector may compel traders to think otherwise.
Rising Rates. Falling Tech Stocks.
For more than a decade through the end of 2021, technology was a sector-level standout, benefiting from accommodative monetary policy. During that span, the Federal Reserve kept interest rates low, providing ballast to “long duration” sectors, including tech.
Below is a daily chart of the Technology Select Sector Index* as of Nov. 2, 2023.
Source: Stockcharts.com
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results.
That party abruptly ended in early 2022 when the Fed set out on a campaign of rate tightening. Higher interest rates make the future cash flows of growth companies, including tech firms, less appealing. That much was confirmed last year when the Technology Select Sector Index slumped 27.7% (ETF Replay) – a performance that was 950 basis points worse than that of the S&P 500®.
A similar scenario has been on display as of late. Yields on U.S. 10-year Treasuries recently touched 5% after falling under 3.3% earlier this year. Short-term traders willing to wager that the Fed may be forced to raise rates again – something some experts believe is a distinct possibility (CNBC) – may evaluate Direxion’s Daily Technology Bear 3X Shares (Ticker: TECS), which seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the Technology Select Sector Index.
Will Earnings Tempt Tech Bulls?
Interest rates are clear headwinds for tech stocks but the sector’s fundamentals, including earnings, remain sturdy. As of Oct. 27, 95% of the S&P 500® tech members that reported results delivered earnings per share (EPS)* ahead of consensus estimates, according to FactSet. That’s good for the highest percentage among the 11 GICS sectors.
Nearly two-thirds of S&P 500® tech companies that have reported for the third-quarter cycle beat revenue estimates, too, and tech’s year-over-year EPS growth is fourth best among the 11 sectors.
While Microsoft Corporation (Ticker: MSFT) and Apple Inc. (Ticker: AAPL) have already stepped into the earnings confessional, Nvidia Corporation (Ticker: NVDA) is expected to report on Nov. 21. Traders with bullish expectations for remaining earnings reports may consider Direxion’s Daily Technology Bull 3X Shares (Ticker: TECL), which seeks daily investment results, before fees and expenses, of 300% of the performance of the Technology Select Sector Index.
To view the funds’ full holdings, click here. Holdings are subject to risk and change.
*Definitions & Index Descriptions
The Technology Select Sector Index (IXTTR) is provided by S&P Dow Jones Indices and includes domestic companies from the technology sector which includes the following industries: computers and peripherals; software; diversified telecommunications services; communications equipment; semiconductors and semi-conductor equipment; internet software and services; IT services; electronic equipment, instruments and components; wireless telecommunication services; and office electronics. One cannot directly invest in an index.
The "Technology Select Sector Index" is a product of S&P Dow Jones Indices LLC ("SPDJI"), and has been licensed for use by Rafferty Asset Management, LLC ("Rafferty"). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Technology Select Sector Index.
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Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to the Technology Sector. The value of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles. Additional risks include, for the Direxion Daily Technology Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Technology Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
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