Recent quarterly earnings results from U.S. technology companies have come in mostly better than expected. However, the positive earnings reports have failed to allay concerns about growth or valuations, keeping uncertainty high about the sustainability of this year’s rally in technology stocks.
The tech-heavy Nasdaq 100 Stock Index ($IUXX) (QQQ) is up nearly +2% since mid-April when results from Netflix began this earnings season, outpacing the -0.7% decline in the S&P 500 ($SPX) (SPY) over the same period.
The Nasdaq 100 is up +22% this year, which has pushed the valuations of most technology stocks to elevated levels. GenTrust said it is “very cautious” of the outlook for the technology sector, despite what has been a “great” earnings season for tech stocks, saying, “You need to see additional growth to justify gains beyond what we’ve already seen, and that will be difficult.”
In a note to clients last Friday, Bank of America said it expects a recession “to crack credit and tech” just like it did in 2008. Bank of America warns that the Federal Reserve is unlikely to pause hiking interest rates amid high inflation and low unemployment. Also, Bloomberg Intelligence said the rally in technology stocks appears to have gotten ahead of itself, and they expect the sector to fall as the stocks “face the reality of higher-for-longer interest rates and a tempered earnings outlook.”
Although concerns were elevated before this earnings season, most technology companies reported better-than-expected results. According to Bloomberg data, 86% of tech companies in the S&P 500 topped profit estimates, while 76% beat revenue estimates. However, the full-year outlook appears gloomy as earnings for the S&P 500 tech sector are expected to decline -8.8% this year, with revenue falling -1%. That compares with an expected drop of -2.5% for earnings in the overall S&P 500, and lackluster +1.9% growth in revenue.
With stock prices climbing and profit estimates falling, the technology sector is getting more expensive. The Nasdaq 100 is above its long-term average at 24 times projected earnings over the next 12 months. Ameriprise Financial said investors “have been holding out in big tech, but now a lot of expectations have been built into the idea of them as stable growers, and they will have to live up to that to continue to support these valuations. This has been a good earning season relative to our worst fears, but the growth rate is naturally slowing, and if there is a more material downturn in fundamentals, the technology sector might be pressured.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
