Bullish outlook this season for US tech stocks

WHEN it comes to reporting earnings, companies appear to have had a relatively easy time of it. For more than a year now, the vast majority of firms have beaten analysts’ consensus estimates, sending their share prices shooting skyward. All they have needed to do to win the market’s favour is to report figures that are less bad than feared rather than demonstrate any underlying success.

With Alcoa kicking off the US earnings season on 12 July after the market close, contracts for difference (CFDs) traders’ minds are once again turning towards the expectations for second quarter results. Will American firms be able to surpass forecasts once again?

Surpass no, but match yes, believes Mary Chris Gay, senior vice-president and a portfolio manager at Legg Mason Capital Management, an asset management firm. “With an extremely large number of companies having beaten expectations in the past three quarters, it is clear that it is not sustainable. But we still believe that earnings will be coming in either in line or modestly better than expected for most of the industries.”

She is not the only one expecting a decent showing from US companies this quarter. James Abate, manager of the PSigma American Growth Fund, believes the US market has hit its trough and will not slump further this year. He predicts a strong reporting season for earnings, ahead of the consensus. “The US is standing head and shoulders above other developed markets, and businesses will benefit from this relative strength. Now things are starting to turn around, or at least stabilise, companies will be able to take advantage of this,” he explains.

But where should CFD traders look for outperformance? There is, at least, some consensus with technology and healthcare in general favour. Charles Schwab’s Kully Samra explains that as economic growth starts to mature, companies with strong balance sheets, dividend payments and stable revenues will appear attractive – all offered by technology and healthcare. Technology stocks are also looking attractive from a valuations perspective. Names in the sector have seen their stocks decline as concerns weigh on the market, says PSigma’s James Abate, adding that he has “reloaded” on the back of recent weakness.

He likes both Apple and Google, two companies that in his opinion are deservedly trading at a premium to the market, as well as Micron Technology and SanDisk, which are benefiting from continued favourable supply and demand dynamics. Legg Mason’s Gay points to Microsoft, Texas Instruments and Cisco as among the largest holdings of her fund.

So should CFD traders be looking to trade US sectors or should they be stock-picking? While it’s easier to take a punt on a sector, Gay says that in the early stages of a bull market, the stock picker is at an advantage: “There is a bifurcation between companies that can actually grow and those that happen to be in a strong-performing sector.”

Consequently, it might well be worth using the next two weeks to research your stocks and place your trades accordingly.