(Bloomberg) — US tech stocks are about to hit the next hurdle when the earnings season for the most influential segment of the S&P 500 Index begins next week. It’s a loss of profit.
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The technology-heavy Nasdaq 100 stock index enters this important stretch amid a dark backdrop that has hampered a strong start to the year. Underscoring the risks ahead, Microsoft Corp., which began reporting on the group on Tuesday, joined his Amazon.com Inc. this week to begin laying off thousands of jobs as sales slowed. Google’s parent company, Alphabet Inc., has followed its own plan to cut its workforce.
Data compiled by Bloomberg Intelligence show that Wall Street has been cutting earnings forecasts for its tech sector for months, which is expected to be the biggest drag on earnings for the S&P 500 in the fourth quarter. But the danger for investors is that analysts are still proving too optimistic, with demand for the industry’s products collapsing as the economy cools.
“Technology is responsible for much of the overall earnings recession we’re seeing at the S&P,” said Michael Casper, an equity strategist at Bloomberg Intelligence. A lot is priced in, but there is certainly still some downside correction risk in the sector.”
Companies such as Texas Instruments, Lam Research and Intel will also announce next week. Apple Inc., Alphabet, and other giants will announce it the following week. This group has significant influence over the course of the overall market, with information technology accounting for more than 25% of the S&P 500 market capitalization.
Data compiled by BI show that fourth-quarter earnings for benchmark technology companies are projected to fall 9.2% from the same period last year, the biggest decline since 2016. It’s worth noting how quickly the sentiment deteriorated. Three months ago, Wall Street profits were flat.
Revenue growth for these companies has slowed compared to the past two years, when the pandemic and ensuing lockdowns have boosted sales of everything from digital services to personal computers and the components that power them. Rising costs are also putting pressure on profits.
But the worry is that even with the Nasdaq 100 down 33% last year, valuations aren’t cheap. The gauge is priced at approximately 21x your projected gains over the next 12 months, compared to an average of 20.5x over the past 10 years. After the recession that ended in 2009, the multiple bottomed out at 17.7x in 2020 and 11.3x in 2011.
Still, for Sameer Bhasin, principal at Value Point Capital, most of the bad news is factored in.
“The technology isn’t suffering from an industry demand problem, it’s suffering from the digestion of excess built in during the pandemic,” he said. I have someone else’s money.”
Analysts expect technology earnings to return to growth in the second half, as data compiled by BI shows. This will make management’s full-year outlook more material to the stock.
Investors should watch out for a number of risks as returns rise in the coming weeks.
Among them are the possibility that inflation is more entrenched than many expected and the impact of higher interest rates on earnings, according to Nick Getaz, portfolio manager at the Franklin Rising Dividends Fund. said to have an impact.
“Monetary policy has a lag and we are likely still in that window,” he said. “We didn’t see the expected earnings impact of the rate hike.”
Other parts of corporate earnings:
–With help from Ryan Vlastelica.
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