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Tech stocks are best positioned this earnings season, says analyst Nick Colas

Key Points
  • Technology is the place to look this earnings season, says DataTrek Research's Nick Colas.
  • The sector is important to the market and there is a wide disparity of expectations, he says.
  • Apple, in particular, is poised to beat, he predicts.
A Chinese man holds his son as they look at iPhones on display at an Apple store on January 7, 2019 in Beijing, China.
Kevin Frayer | Getty Images

It's expected to be a "sloppy" earnings season but there is one sector that is the best positioned as the first-quarter reporting gets underway, analyst Nick Colas told CNBC on Tuesday.

"Technology is honestly the place where you have to look both because of its importance to the market and because you have a wide disparity of expectations, between say an Apple and an Amazon," the co-head of DataTrek Research said on "Closing Bell."

Tech companies have been bracing investors for a bad quarter – and that has led analysts to cut the numbers they expect the firms to hit. Because of that, Colas thinks they have a good chance to beat those expectations.

Plus, tech is the largest sector of the S&P 500 and an outside profit driver of the index's earnings, he said. Colas anticipates that the sector will continue to be the market leader.

Apple, in particular, is poised for an upside surprise, Colas predicted. Wall Street analysts are expecting a 14% drop to earnings and a 6% decline in revenues, he pointed out.

"The numbers have come down all the way through the quarter," he said. "That seems like a low enough bar to beat."

Amazon, on the other hand, has seen its expectations raised. Analysts expect the e-commerce company to grow earnings by 44%, Colas said.

Overall, earnings season has been going very well because expectations are slow low, he noted. However, the big issue is margin compression, which has put a "spook" into the season.

"It's been more worries about what's going on below the top line and that's what's pulled the numbers down," he said.

In the end, it's really about what's coming up — rather than looking backward.

"It's not Q1 earnings season. It's 'tell me about the back half' season," Colas said. "We are looking for confidence from managements that even if the first quarter is kind of sloppy, which it obviously will be, that the back half of the year is 3% to 5% growth, which is what the analysts are looking for now."

On Tuesday, Netflix reported quarterly revenue that beat estimates but included light guidance for the following quarter. The stock fell 1% on the news. Shares of IBM also dropped on Tuesday after the company said it generated less revenue than analysts had expected.

— CNBC's Melody Myers, Jordan Novett and Lauren Feiner contributed to this report.