(Bloomberg) — U.S. tech stocks are about to face their next hurdle as earnings season for the S&P 500 Index’s most influential segment kicks in next week: vanishing profits.
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The tech-heavy Nasdaq 100 stock index entered this pivotal period amid the gloom that short-circuited a strong start to the year. Highlighting the risks ahead, Microsoft Corp., which began the group’s report on Tuesday, joined Amazon.com Inc. began cutting thousands of jobs this week due to slowing sales. Google’s parent company, Alphabet Inc. pursued plans to shrink its own workforce.
Wall Street has slashed multi-month earnings estimates for the tech sector, set to be the biggest drag on S&P 500 profits in the fourth quarter, data compiled by Bloomberg Intelligence shows. The danger for investors, however, is that analysts remain overly optimistic, with demand for industry products faltering as the economy cools.
“Tech is driving a lot of the overall earnings downturn we’re seeing in the S&P,” said Michael Casper, an equity strategist at Bloomberg Intelligence. “While a lot goes into it, depending on whether or not this recession hits and how badly it turns out, there is certainly some downside risk to the sector. this area.”
Companies include Texas Instruments Inc., Lam Research Corp. and Intel Corp. Will also report next week. Apple Inc., Alphabet and other giants will announce next week. This group has a huge influence on the path of the overall market, with information technology accounting for more than 25% of the market capitalization of the S&P 500.
Fourth-quarter earnings for tech companies in the benchmark are expected to fall 9.2% year-over-year, the steepest slide since 2016, data compiled by BI show. The pace of the psychological decline is remarkable: Three months ago, Wall Street saw only flat returns.
These companies’ revenue growth is slowing from a few years ago, as the pandemic and ensuing lockdowns boosted sales for everything from digital services to computers. individuals and the components that power them. Higher costs are also squeezing profits.
Valuation concerns
Worryingly, however, valuations are still far from cheap despite the Nasdaq 100’s 33% drop last year. The index is valued at about 21 times expected returns over the next 12 months, compared with an average of 20.5 over the past decade. , and cutting the estimate further will only make it look more expensive. The coefficient bottomed out at 17.7 in 2020 and 11.3 in 2011, after the recession ended in 2009.
However, for Sameer Bhasin, principal at Value Point Capital, most of the bad news is already priced in. He predicted that first-quarter profit estimates could fall even further, but said some concerns were overblown.
“Technology is not suffering from industry demand problems, but it is suffering more from digesting the excesses that have been formed during the pandemic,” he said. “There is money on the sidelines waiting to be brought back into the field.”
Analysts predict that technology profits will grow again in the second half of the year, data compiled by BI shows. That should make the outlook for executives for the full year all the more important for stocks.
As earnings arrive in the next few weeks, investors will have more risks to watch.
Among them is the possibility of inflation proving to be more entrenched than many expect, as well as the impact of higher interest rates on the economy, said Nick Getaz, a portfolio manager with the Franklin Rising Dividends Fund. profit.
“Monetary policy has a lag and we might still be in that window,” he said. “We haven’t seen the earnings impact you’d expect from a rate hike.”
Elsewhere in corporate earnings:
–With support from Ryan Vstelica.
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