Earnings are coming for rising tech stocks

Apple Inc., Microsoft Corp. to account for S&P 500’s 7% advance this year amid banking industry turmoil. And other megacaps are almost single-handedly responsible for causing investors to flock to perceived havens. With first-quarter profits forecast to drop 15%, investment professionals are bracing for a significant pullback if the giant fails to meet expectations.

“Tech is crushing it, but now we are at an inflection point,” said Philip Orlando, chief equity markets strategist at Federated Hermes. Earnings trends look terrible and prices look very high. There’s a lot on my list of concerns and if there’s a sudden hiccup in guidance or macro or whatever, these stocks could get crushed.”

Apple, Amazon.com Inc., and Alphabet Inc. are up nearly 20% this year, outpacing a 19% gain for the Nasdaq 100. Nvidia Corp., Tesla Inc., and Meta Platforms Inc., are up even more — from 50% to 88%. JPMorgan strategists led by Mislav Matejka said the group looks overbought.

The projected decline for tech earnings in the first quarter would be the largest since 2009. The S&P 500 Index saw an 8% decline in earnings for the period. Consensus continues to weaken: Six months ago, analysts overall were expecting tech-sector earnings growth of 1%.

Expectations from big companies are decreasing. The average estimate for Apple’s earnings in the just-ended quarter fell 4.4% over the past three months. Microsoft has a similar trend, and for both, they’re downgrading what analysts expect for the full year.

The worsening outlook reflects a number of headwinds, including weak economic growth, further interest rate hikes by the Federal Reserve to combat inflation, and turmoil in the banking sector, which threatens to curtail corporate access to lending. However, one place these concerns are not being seen is in stock prices, where a rally has taken the price-earnings multiple higher.

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Last quarter, 85% of tech companies in the S&P 500 beat expectations on earnings, compared to 69% of overall S&P 500 constituents. Only 56% of tech stocks beat them in terms of revenue, compared to 58% for the S&P.

The combination of falling projections and rising prices means valuations are overstated, especially given that the International Monetary Fund’s outlook for global economic growth over the next five years is the weakest since 1990.

Apple is trading at 26 times estimated earnings, well above its 10-year average of 18. Microsoft is also at a premium to its long-term average, and both trade above the Nasdaq 100’s 24 multiple, which is itself higher than its long-term average. Term average. The forward earnings multiple of the S&P 500 Information Technology Index, relative to the overall benchmark, recently reached its highest level since 2005.

“You really have to look at earnings to justify a valuation like this,” said Jeffrey Buchbinder, who oversees more than $1.1 trillion in debt as chief equity strategist for LPL Financial. Run has been done, misses will be punished. This is a valuation-driven rally, and those are the kinds of gains that can come out of a stock quickly.”

today’s tech chart

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Nvidia has been the standout performer of 2023, rising 88% as the best-performing component of the Nasdaq 100 Index. The surge easily trumped the index’s 19% advance, as well as the Philadelphia Stock Exchange Semiconductor Index’s 24% gain. Much of Nvidia’s advancement has been related to its interest in artificial intelligence technology.