Stock Market News – XM (blog)

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Stock Market News – Tech selloff: an opportunity to buy the dip?


Andreas Georgiou, XM Investment Research Desk

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Following the Senate’s approval of the tax bill over the weekend, the Dow Jones Industrial Average posted a record-high close during Monday’s trading. Despite finishing at an all-time high though, positive sentiment from earlier in the day was not maintained and the blue-chip index gave up on most of its earlier gains. The S&P 500 slid by 0.1%, with technology stocks being a notable underperformer dragging the index lower from a 0.9% gain at its session high, and the tech-heavy Nasdaq Composite lost 1.05%.

Technology companies have been outperforming throughout the year. However, tech is one of the sectors standing to gain the least from US corporate tax cuts. According to data by Standard & Poor’s, the effective tax rate for large-cap tech companies stands at 18.5%. This compares to a much higher 29.0% for financials and a 33.8% for telecommunication services, the sector with the highest effective tax rate.

Telecommunication services and financials were the lead S&P 500 gainers during Monday’s trading as technology stocks lost ground, while a divergence in performance between the former two and tech was evidenced starting November moving forward as the tax bill passage story was gaining positive momentum (though notice in the chart below that telecom is performing poorly year-to-date with returns being negative).

The chart above though does not merely show the recent divergence in performance between tech and two sectors expected to benefit much more from tax reform, but it also illustrates the incredible run within the tech space so far in 2017. Profit-taking on partially fears of an overextended rally in the sector is also likely to an extent to blame for the selloff that took place.

Another factor is regulation. Jerome Powell, who is to replace Janet Yellen as Fed chief once her term expires in February next year, eased concerns that increased regulatory burdens following the 2008 global financial crisis would continue to be imposed on the financial sector, whilst appearing before Congress. This has put financials on a positive footing relative to tech as recent developments in the US make the latter look as increasingly being in a position that would see it face added regulatory scrutiny in the future.

The House of Representatives and the Senate now have to work on reconciling the differences in the different versions of the tax bill they voted in favor of and produce a joint bill to be signed by President Trump. Progress on this front is likely to see further rotation out of tech stocks and into other sectors, such as financials. However, declines are providing opportunities for savvy investors to buy the dips in tech, as fundamentals in the sector remain strong and this was well supported by the latest releases of quarterly results. At least this – strong fundamentals – more conclusively holds true for the FAAMNG (Facebook, Apple, Amazon, Microsoft, Netflix and Google) group of stocks; all of them experienced declines during Monday’s trading.

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