Microsoft reports biggest drop in tech earnings since 2016

The tech-heavy Nasdaq 100 stock index entered this significant stretch amid a dark backdrop that cut short a strong start to the year. Outlining the risks ahead, Microsoft Corp, which ceased group reporting on Tuesday, was joined by Amazon. Com Inc. has begun cutting thousands of jobs this week due to slowing sales. Google Parent Alphabet Inc followed its own plans to reduce its workforce.

Wall Street has been slashing earnings estimates for months for the tech sector, which is expected to be the biggest drag on S&P 500 profits in the fourth quarter, data compiled by Bloomberg Intelligence show. However, the danger for investors is that analysts still prove to be too optimistic, with demand for the industry’s products falling as the economy cools.

“Tech is driving a lot of the slowdown in overall earnings that we’re seeing in the S&P,” said equity strategist Michael Kasper. Bloomberg intelligence. “While there is certainly some downside revision risk for the sector, depending on whether this downturn emerges and how badly it is.”

Firms including Texas Instruments Inc, Lam Research Corp and Intel Corp also report next week. Apple Inc., Alphabet and other behemoths make announcements week after week. With information-technology accounting for more than 25% of the S&P 500’s market capitalization, the conglomerate has enormous influence over the path of the overall market.

Fourth-quarter earnings for tech firms in the benchmark are forecast to be down 9.2% from the same period a year ago, the sharpest drop since 2016, data compiled by BI show. The speed of the decline in sentiment is remarkable: Three months ago, Wall Street had seen profits only flat.

Revenue growth for these companies is pale relative to the past few years, when the pandemic and ensuing lockdowns supercharged sales for everything from digital services to personal computers and the components that run them. Profits are also decreasing due to high cost.

valuation concerns

Worryingly, though, valuations are still far from cheap, despite the Nasdaq 100’s 33% decline last year. The gauge is priced at an estimated 21 times earnings over the next 12 months, compared to an average of 20.5 over the past decade. , and further cuts in estimates will only make it more expensive. In the wake of the recession that ended in 2009, the multiplier dropped to 17.7 in 2020 and 11.3 in 2011.

Yet, for Samir Bhasin, principal at Value Point Capital, most of the bad news has had a price. He estimates that first-quarter profit estimates could fall further, but says some fears are overstated.

“Tech is not an industry suffering from a demand issue, it is suffering more from digestion of excesses created during the pandemic,” he said. ,

Analysts expect the tech gainer to return to growth in the second half of the year, data compiled by BI show. That would make executives’ outlook for the full year more critical of stocks.

As earnings roll in over the next few weeks, investors will have plenty of risks to monitor.

Among them is the possibility that inflation proves stronger than many expected, as well as the impact of higher rates on profits, says Nick Getaz, portfolio manager at the Franklin Rising Dividend Fund.

“There is a gap in monetary policy and we are still in that window,” he said.

The text of this story is published from a wire agency feed without any modification.