The recent rally in technology stocks has lost momentum, despite a solid quarterly earnings reporting season. According to Bloomberg data, about 89% of the technology companies in the S&P 500 ($SPX) (SPY) that have reported earnings this reporting season have beaten estimates. However, those stocks fell an average of -0.8% the day after reporting earnings.
The faltering rally suggests that the good earnings news is already priced into the market. Carnegie Investment Counsel said, “You need to have results that are just incredible for that to be sustained.” This year’s stock gains have lifted valuations toward levels last seen when interest rates were near zero, and “it makes sense that we are seeing a pause and a pullback this season.”
The Nasdaq 100 Stock Index ($IUXX) (QQQ) has gained 40% this year, pushing valuations well above the index’s 10-year average at about 25 times projected profits. However, the Nasdaq is down more than -3% from its peak on July 18, when earnings season was just getting started. Apple (AAPL) is down more than -2% today despite reporting better-than-expected quarterly earnings estimates late Thursday. Bloomberg Intelligence said, “A lot of these earnings beats were priced in, and as a result, there’s not a lot of excitement.”
A surge in bond yields this week is a significant obstacle for the technology stock rally to continue. The 10-year T-note yield jumped above 4% this week to a nearly 9-month high today of 4.204%, amid strong U.S economic news and focus on the expanding fiscal deficits in the U.S. after Fitch Ratings cut the sovereign credit rating of the U.S. by one level to AA+ from AAA. Technology stocks are more sensitive to interest rates, which are used to determine the present value of profits expected in the future.
The positive earnings beats this quarterly reporting season have prompted many analysts to raise estimates for the second half of the year. According to Bloomberg data, technology sector profits for 2023 are now projected to fall -7.9% compared with an -8.2% expected decline a month ago, before earnings season got underway. Bloomberg Intelligence believes a pause in the rally could set the market up for more gains in the near future as earnings estimates continue to climb, and “if tech multiples are able to moderate a bit, it could go a long way to helping investor sentiment in the group, given how skittish everybody is about valuations right now.”.
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.
