Top Tech Sector Picks Ahead of Q2 Earnings

The S&P 500's Information Technology sector saw growth in Q1 amid easing geopolitical tensions and reduced concerns regarding Trump's tariff policies. The tech sector holds the highest weightage on the S&P 500 and gained during the quarter.

The S&P 500's Information Technology sector saw robust growth in the first quarter of 2025, driven by easing geopolitical tensions and reduced concerns regarding President Trump's tariff policies. The tech sector, which holds the highest weightage on the S&P 500, gained significantly during the quarter [1].

After a strong performance throughout 2024, the technology sector experienced a collapse in the first quarter of 2025 before rebounding in the second. The Morningstar US Technology Index is up 14.8% on a trailing 12-month basis, compared to the US equity market's 15.1% growth [1]. Over the past quarter, the wider market was up 22.9% while tech was up 37.6% [1].

The sector rebounded from a weak first quarter, when it was the second-worst-performing sector. Results for software companies have remained solid, supporting share performance. The median US technology stock is fairly valued, with little margin of safety [1].

The tech sector's performance over the last 12 months has been below average, coming in just below the broader market. However, our confidence in secular tailwinds, such as cloud computing, artificial intelligence, and the long-term expansion of semiconductor demand, remains unchanged [1].

Generative AI remains a prominent theme, with software firms developing and incorporating next-gen AI capabilities into their solutions. Cloud providers are introducing new services and increasing capacity, while some semiconductor firms, such as Nvidia, are seeing surging demand for AI and data center chip applications [1].

Microsoft, NXP Semiconductors, and Atlassian are among the top picks in the tech sector. NXP Semiconductors, with a fair value estimate of $280.00, has a wide economic moat and high uncertainty rating. Atlassian, with a fair value estimate of $250.00, has a narrow economic moat and high uncertainty rating [1].

The tech sector's earnings growth has been impressive, with the expected EPS growth for Q2 2024 in line with the previous 5 quarters. However, the "upside surprise" factor seems to be diminishing a little bit over the last 5 quarters [2].

The uncertainty surrounding Trump's tariff policies continues to impact the sector. The tech industry is once again on a knife's edge after the president signed an executive action delaying the implementation of his reciprocal tariffs [3]. The decision has left the sector in limbo, with companies like Nvidia and Apple facing individual actions from the administration.

In conclusion, the tech sector's rebound in Q1 2025 was driven by easing geopolitical tensions and reduced concerns regarding Trump's tariff policies. The sector's performance over the last 12 months has been below average, but our confidence in secular tailwinds remains unchanged. The sector's earnings growth has been impressive, but the uncertainty surrounding tariff policies continues to impact the sector.

References:
[1] https://www.morningstar.com/stocks/technology-sector-bounces-back-after-sluggish-q1
[2] https://www.investing.com/analysis/technology-sector-looking-at-the-upside-surprise-factor-over-last-5-quarters-200663366
[3] https://finance.yahoo.com/news/trumps-tariff-changes-leave-big-tech-in-limbo-204340259.html