SAN FRANCISCO, June 28 (Reuters) - Technology stocks are Wall Street's top performers as 2019 hits half-way, with investors betting on lower interest rates, although Apple and chipmakers face turbulence related to the U.S.-China trade war.
The S&P 500 information technology index has surged 9% in June, its strongest month in three years. That rally, and the S&P 500's record high on June 21, reflect investors' increased appetite for risk as they become more confident the Federal Reserve will cut interest rates to support a slowing economy.
It also shows that Wall Street is mostly confident that U.S. President Donald Trump, who has shown a dislike for stock market downswings, will ultimately resolve his trade conflict with China.
Looking for evidence of progress on the trade front, investors will closely watch a planned meeting this weekend between Trump and China's president, Xi Jinping, at the upcoming Group of 20 summit in Japan.
"The risk to the downside is the greatest. If trade talks break down then we could head lower, probably a lot further, and the tech sector could be a leader to the downside," said Randy Frederick, Vice President of Trading & Derivatives at Charles Schwab.
Other investors say their optimism about the tech stocks is grounded in expectations that the sector's earnings growth will outperform the rest of the economy over the next several years.
"Our expectations for genuine progress regarding tariffs at the G20 is quite low," said David Carter, chief investment officer at Lenox Wealth Advisors in New York. "Tech is less of a short-term tactical play, and more a belief in the long-term growth potential of the space. Certainly, it's affected by tariffs and regulation, but the growth story is still there."
Although just short of its April record high, the technology index is up 26% so far in 2019, leading other sectors by far and easily beating the S&P 500's 17% return. Among June's strong performing technology stocks are Nvidia, Apple , Xerox, each up over 13%.
Facebook, Amazon and Netflix all rose more than 7% in June, slightly outperforming the S&P 500's increase of just under 7% as investors increased bets on high-growth, volatile stocks.
Uncertainty related to the trade conflict and Washington's blacklisting of China's Huawei have pushed the Philadelphia Semiconductor Index down 8% from its record high in April, but it is still up 27% for the year, buoyed by expectations that a slump in global sales is near its bottom and that demand is set to recover.
The benchmark chip index has surged over 5% since Tuesday, when Micron Technologies said it resumed some sales to Huawei and forecast a recovery in memory chip demand in the second half of the year.
Underpinning not just tech, but most of Wall Street's recent strength, is the recently increased confidence that the Fed will cut interest rates as soon as July, with interest rate futures pointing to three rate cuts this year to support already dwindling economic growth.
The recent strong performance of technology stocks comes even as analysts predict a drop in quarterly earnings for the sector, in part due to uncertainty around the trade war. Many U.S. semiconductor companies rely on China for over half of their revenue.
Analysts on average expect the S&P 500 IT sector's earnings per share to sink 8% in the second quarter, compared to a 0.3% increase predicted for the S&P 500, according to Refinitiv's IBES data.
S&P 500 semiconductor companies are seen posting a much deeper 28% slump in second-quarter earnings, and a 20% drop for all of 2019. Analysts on average expect Advanced Micro Devices and rival Nvidia to post declines of over 40% in earnings per share for the quarter.
A resolution of the trade conflict would lead analysts to increase their earnings estimates for the technology sector to reflect improved global economic conditions, Frederick said.
"The economy really hasn't slowed down that much. That says we're still in a cyclical market and there’s still some upside potential, and tech tends to be one of the leaders when you’re in a cyclical market," he said.
Reporting by Noel Randewich; editing by Alden Bentley and Chizu Nomiyama