Should Investors Chase Tech Gains Into Year-End?

Key Points

• The popular tech ETF XLK has gained 21.3% year-to-date and is consolidating near its 52-week high, with strong breakout potential.
• December’s seasonal strength and resolved uncertainties could provide the boost tech needs to finish the year strong.
• While NVIDIA leads the charge, XLK’s rally depends on Apple and Microsoft overcoming their underperformance.

With just over a month remaining in 2024, the tech sector stands out as one of the year’s top performers. The Technology Select Sector SPDR ETF NYSE: XLK, which tracks the performance of leading tech stocks, has gained an impressive 21.3% year-to-date. Despite its strong run, XLK shows signs of potential for even more significant gains as it consolidates within an ascending wedge formation, just 1.96% away from its 52-week high. This proximity to a potential breakout raises an important question: Should investors chase further gains in the tech sector as we approach year-end?

December’s Seasonal Tailwind

Historically, December has been a favorable month for equities. According to Dow Jones Market Data, the S&P 500 has averaged a 1.3% gain in December going back to 1928, making it the third-best month of the year for stocks. This seasonal strength could provide the tailwind tech needs to finish 2024 on a high note, particularly now that two key uncertainties, the U.S. election and NVIDIA’s highly anticipated earnings report, are behind us.

However, XLK has lagged the broader S&P 500 slightly in recent months. If the tech sector outperforms in December, it would mark its third year of outperformance out of the last four years. However, whether XLK breaks out and rallies further hinges on the performance of its top three holdings: NVIDIA, Apple, and Microsoft, which collectively account for nearly 41% of the ETF’s weighting.

NVIDIA: The Sector’s Torchbearer

As the largest holding in XLK, NVIDIA NASDAQ: NVDA wields significant influence over the ETF’s performance. The company continues to dominate the AI landscape, and its recent Q3 earnings were stellar. NVIDIA reported a 93.6% year-over-year revenue increase to $35.08 billion, beating analyst expectations, while adjusted EPS of $0.81 surpassed estimates by $0.12. Demand for its AI-driven Hopper and Blackwell platforms remains impressive, with the company improving gross margins and maintaining strong profitability.

From a technical perspective, NVDA is consolidating near its all-time high, trading just below the $150 resistance level. A decisive breakout above this zone could ignite momentum in both NVDA and XLK, providing a solid catalyst for year-end gains in the tech sector.

Apple and Microsoft: The Deciders

While Apple NASDAQ: AAPL and Microsoft NASDAQ: MSFT have underperformed NVDA and XLK this year, their contribution to the ETF's direction remains critical.

Apple has spent much of the year consolidating and is just 3.77% away from its 52-week high.

This tight range could serve as a launchpad for a breakout if broader market sentiment remains favorable. A shift in momentum here would significantly bolster XLK’s performance.

Microsoft, on the other hand, has been the weakest of the trio. Down 12% from its 52-week high, the stock has struggled with relative weakness throughout the year.

However, a breakout above $430 could signal a trend reversal, providing much-needed support to XLK.

With MSFT’s historical resilience and dominance in cloud computing, the potential for a short-term recovery cannot be dismissed.

Balancing Risk and Reward

The setup for XLK heading into December is promising, but chasing gains without clear confirmation carries risks. NVIDIA appears well-positioned to lead the charge, but the underperformance of Apple and Microsoft could temper the sector’s upside potential.

Investors looking to capitalize on XLK’s potential breakout may want to wait for signs of strength from its top three holdings, notably Apple and Microsoft. While NVIDIA’s trajectory suggests bullish momentum, the broader sector will need support from these two lagging giants to sustain a rally into year-end.