Tech stock rebound faces doubters with earnings season ahead
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[January 21, 2023] By
Lewis Krauskopf
NEW YORK (Reuters) - A spate of earnings reports in coming weeks is set
to test a recent bounce in technology and other megacap stocks, a
category whose leadership position in U.S. markets has faltered after
last year’s deep selloff.
The tech-heavy Nasdaq 100 index has gained nearly 6.2% in 2023, compared
to a 3.45% rise for the S&P 500. Shares of some megacap companies -
which include those grouped outside of tech in sectors like
communication services and consumer discretionary - have shot higher,
with Amazon, Meta Platforms and Nvidia posting double-digit percentage
increases.
Several factors are driving that outperformance, including investors
piling into stocks they believe were overly punished in 2022. A
moderation in bond yields, whose jump last year particularly pressured
tech-stock valuations, is also likely helping the group, investors said.
Now, however, the focus is shifting to whether these companies can
withstand a widely expected economic downturn while supporting
valuations that some investors believe are too high.
"To keep this rebound going, the guidance for ’23 has to be less worse
than what people are anticipating," said Peter Tuz, president of Chase
Investment Counsel, whose firm recently pared its holdings in Apple and
Microsoft.
Tech and growth stocks led U.S. equity markets for years following the
2008 financial crisis, aided by near-zero interest rates. They struggled
along with broader markets last year as the Federal Reserve raised rates
to fight surging inflation, and some investors doubt they will regain
the market's pole position any time soon. The Nasdaq 100 fell 33% in
2022, while the S&P 500 lost 19.4%.
The top six stocks by market value in late 2021 - Apple, Microsoft,
Alphabet, Amazon, Meta and Tesla - have seen their collective weight in
the S&P 500 fall from 25% to 18%, according to Strategas Research
Partners.
That dynamic echoes a pattern seen after the market’s dot-com bubble
burst after the turn of the century. The six biggest stocks at that time
saw their collective weight in the S&P 500 decline to 5% from a peak of
17% over a number of years, according to Strategas.
"This leadership unwind ... is going to be one that is measured in
years, not in months or quarters," said Chris Verrone, head of technical
and macro research at Strategas.
EARNINGS TEST
Companies comprising over half the S&P 500's market value are due to
report results in the next two weeks, including Microsoft, the
second-largest U.S. company by market value, on Tuesday, Elon Musk's
Tesla and IBM on Wednesday and Intel on Thursday. Apple, the largest
U.S. company by market value, and Google-parent Alphabet report the
following week.
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Signage is seen at the New York Stock
Exchange (NYSE) in Manhattan, New York City, U.S., November 11,
2022. REUTERS/Andrew Kelly
Fourth-quarter earnings in the tech sector are expected to have
declined 9.1% from a year ago, compared to a 2.8% decline for S&P
500 earnings overall, according to Refinitiv IBES.
A critical question for many megacaps, once heralded for their
stellar growth, is whether they can increase revenue and profits
significantly while cutting costs in the face of a possible
recession.
Alphabet Inc said Friday it is cutting about 12,000 jobs, or 6% of
its workforce, the latest tech giant to announce layoffs. Microsoft
on Wednesday said it would eliminate 10,000 jobs while Amazon
started notifying employees of its own 18,000-person job cuts.
"The biggest positive could be if they could show a control of
expenses while keeping at least reasonable growth intact," said Rick
Meckler, partner at Cherry Lane Investments in New Vernon, New
Jersey. "It’s a hard balancing act."
Valuations for tech and megacap companies have moderated after last
year's selloff, though they still stand above those of the broader
market. The S&P 500 tech sector still trades at a roughly 19%
premium to the broader index, above its 7% average of the past 10
years, according to Refinitiv Datastream.
Nonetheless, some investors are reluctant to bet against tech
stocks.
The Wells Fargo Investment Institute counts tech as one of its
favored U.S. sectors.
The firm expects an economic downturn and believes many tech
companies have businesses that are resilient to economic
uncertainty, said Sameer Samana, a senior global market strategist
there.
"It’s just too important and too big a weighting not to
participate," Samana said. "But the years of handily outperforming
the S&P are probably now behind us.”
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili, John
Stonestreet and Daniel Wallis)
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