Market Insights

Tesla, Netflix and Amazon.com are leading a breakout in the technology sector as investors prepare for the Fourth of July weekend.

The e-commerce giant, electric-car maker and streaming-video provider closed at new highs yesterday. But they weren’t alone. Many smaller names are flying as investors embrace businesses that can thrive in the age of coronavirus.

Companies like Shopify (SHOP), Twilio (TWLO), ServiceNow (NOW), Coupa Software (COUP), Plug Power (PLUG), Wix (WIX) and Okta (OKTA) also closed at record levels. Others had potentially bullish chart patterns. (See below.)

The reasons are relatively simple. On one hand, many tech stocks were growing before coronavirus. Then the pandemic confined millions of people to homes, spurring demand for an array of online services: teleconferencing, e-commerce and online entertainment.

Now the economy is starting to reopen, even with the prospect of more social distancing. That creates an almost perfect environment of greater business confidence and more demand for technology.

The Federal Reserve and Technology Stocks

The third ingredient in the mix is a super-dovish Federal Reserve.

“The economy is likely to need support from highly accommodative monetary policy for some time,” the central bank declared in minutes from its June 9-10 meeting. That means interest rates will stay low for years, which also tends to help technology stocks.

The reason is that growth stocks tend to have higher price-to-earnings multiples. That valuation can be flipped around to earnings-to-price, or “earnings yield.” Lower earnings yields correspond to higher prices for stocks. It’s the same as bond yields. Low rates drive up prices.

A slow economy also makes growth stocks more attractive because they don’t need big GDP numbers to flourish. Investors will pay a premium for their growth when other companies like banks and industrials are stagnant or shrinking.

Breakouts, Bullish Patterns

Here are some of the tech stocks that closed at new highs yesterday, with their businesses:

• Amazon.com (AMZN): E-commerce and cloud computing
• Netflix (NFLX): Streaming video
• Microsoft (MSFT): Enterprise software
• Tesla (TSLA): Electric cars
• Equinix (EQIX): Data centers
• ServiceNow (NOW): Enterprise cloud computing
• PayPal (PYPL): Digital payments
• Electronic Arts (EA): Video games
• EBay (EBAY): E-commerce
• Cadence Design Systems (CDNS): Semiconductor software
• Activision Blizzard (ATVI): Video games
• Plug Power (PLUG): Hydrogen fuel cells
• Alteryx (AYX): Data-science analytics
• Okta (OKTA): Identity-management software
• Coupa Software (COUP): Cloud-based procurement and expense-management systems
• Avalara (AVLR): Accounting software
• Splunk (SPLK): Enterprise monitoring and reporting tools
• Wix (WIX): Web hosting

In addition to those breakouts, these stocks had potentially bullish chart patterns:

• RingCentral (RNG): The messaging company has formed an ascending triangle.
• Fortinet (FTNT): The provider of security software has bounced at its 50-day moving average.
• Citrix Systems (CTXS): The provider of security software has formed an ascending triangle.
• Take-Two Interactive (TTWO): The video-game company appears to be completing a long-term cup-and-handle. It had a “golden cross” chart pattern one month ago.

Disclosure: This post is for educational purposes only. None of the stocks discussed should be considered recommendations.