XLK Information Technology Sector SPDR June Outlook—Strength in Semiconductor stocks and benign inflation readings keep XLK the long-term winner in this cycle
Price Action & Performance
XLK ripped in May, aided and abetted by strong earnings from AAPL and NVDA and a benign inflation print mid-month that has forestalled rates from becoming a concern. The Semiconductor industry has fueled the outperformance, and we would expect any corrections there to be seen as accumulation opportunity by the crowd. The Software Industry continued its near-term struggles amidst some troubling earnings releases (notably CRM and INTU).
Economic and Policy Drivers
The consumer has struggled in 2024 and narratives surrounding inflation have persisted. This has led to lower marketing budgets to line up with weaker forecasts. That dynamic was reflected in many recent software industry earnings calls. While on the other end, NVDA beat the highest street estimates by a wide margin and several other Semiconductor stocks had strong quarters as well that were well received by the market. With AAPL posting a strong quarter following weakness to start the year, the sector as a whole overcame weakness in the Software Industry and posted an excellent month in May. With the inflation outlook continuing to remain mixed and indications of a tiring consumer, there is potential for interest rate policy to flip to a tailwind, but it is just as likely we get more tail chasing instead.
How Can XLK Help?
We think going long XLK in June is the right call. It offers exposure to several “Mag7” components including AAPL, NVDA and MSFT. That basket of Mega-Cap. stocks has been a persistent leadership cohort since the bull market got started in 2023. The AI revolution continues to underpin Semiconductor outperformance as an essential “picks & shovels” play on the AI revolution. Software stocks are very discounted in the near-term and any oversold bounce in the large cap. space would be captured by XLK exposure. The sector also historically outperforms in bull markets and is one of the few sectors that is historically interest rate agnostic so long as the equity market trend is higher. That’s the environment we are in at present.
In Conclusion
XLK outperformance has persisted as inflation was not a negative event in May. We look for the outperformance trend to continue at the sector level given the absence of material headwinds and investor recognition of long-term leadership. Our new Elev8 Sector Model debuts with XLK as an OVERWEIGHT allocation of 2.92% for June
Chart | XLK Technicals
- XLK 12-month, daily price | 200-day m.a. | 14-day RSI | Relative to S&P 500
- XLK remains in a long-term uptrend with the recent break-out shifting what had been YTD resistance to support
- Near-term pull-back has alleviated the previous overbought condition from the intra-day high on May 23
Data sourced from Bloomberg
