Surging tech stocks are enjoying yet another impressive rally this year, but earnings season is set to deliver a buzz saw and put a dent in the sector’s upward momentum. Apple Inc., Microsoft Corp., and other megacaps are almost single-handedly responsible for the S&P 500’s 7% advance this year, as investors seek out perceived havens away from turmoil in the banking sector. However, profits are now projected to drop a concerning 15% in the first quarter, and analysts are particularly wary of a hiccup in the tech giant’s performance falling short of expectations.
Philip Orlando, chief equity market strategist at Federated Hermes, declared, “Tech has been crushing it, but now we’re at an inflection point. Earnings trends look dreadful and prices look too high. There’s a lot on my list of concerns, and if there’s suddenly a hiccup associated with guidance or the macro or whatever, these stocks could get crushed.”
Apple, Amazon.com Inc., and Alphabet Inc. are all up about 20% this year compared to the 19% rise for the Nasdaq 100, with leading performers such as NVIDIA Corporation, Tesla Inc., and Meta Platforms Inc. zooming up even more, from 50% to 88%. Described as disproportionately overbought, these elevated valuations are looking even riskier given the IMF’s global economic growth outlook for the next five years being the weakest since 1990.
In aggregate, analysts no longer project any growth from the tech sector in the first quarter and are scaling back what they expect for the full year. Comparatively, the earnings projections for the S&P 500 overall are expected to drop 8%. Last quarter, only 85% of tech companies beat expectations in terms of earnings while 69% of the other components of the S&P 500 managed the same feat.
Apple and Microsoft are facing additional concerns with average estimates for their earnings dropping for the quarter by 4.4% and 5.4% respectively. The potential for the tech giants to fail to meet expectations is a particularly worrying prospect given that the valuation-driven rally is at an understated risk of being wiped out or undermined in its entirety.
One of the highly successful companies in the tech sector is NVIDIA Corporation, as the stock is up 88% as the best-performing component of the Nasdaq 100 Index, besting the 19% advance of the index itself and the 24% gain of the PHLX Semiconductor Index. Much of NVIDIA’s growth has been driven by investor interest in their artificial intelligence technology. NVIDIA’s award-winning graphics cards have been in high demand and have allowed the company to keep up with the ever-evolving gaming world. Its partnerships with tech giants like Amazon, Microsoft, and Google have also enabled it to stay ahead of their competitors while bolstering its reputation as a leader in artificial intelligence. The company’s continuing innovation and creative approach to technology is sure to give them another edge when tech earnings season comes around.