This earnings season has been fairly disappointing so far, and not even megacap tech companies are impressing investors.
Although other sector stars could turn the tide, investors’ reactions Wednesday show that tech is looking a bit vulnerable after being in favor for so long.
The
Nasdaq Composite
closed 2.2% lower Wednesday, following reports from two of the so-called Magnificent Seven—the group of tech giants that accounted for much of the stock market’s gains in 2023. In comparison, the
S&P 500
fell 1.6%.
On Tuesday evening,
Microsoft
provided upbeat guidance, while Google parent
Alphabet
logged better-than-expected earnings. But Google’s advertising revenue miss weighed on social media stocks, and Microsoft’s “masterpiece” of a quarter wasn’t enough to clear high expectations. Its stock slipped 2.7% Wednesday, while Alphabet’s shares dived 7.5%.
The two reports follow Magnificent Seven peer
Tesla,
which turned in what Wedbush called a “train wreck” of a quarter last week.
Tech’s inability to wow so far, in part, reflects how high the sector has flown. Before Wednesday’s drop, the Nasdaq had already risen 3.3% in January through Tuesday’s close, on top of its 44% rally in 2023. And with the Magnificent Seven posting even bigger gains last year, it’s no shock that tech bulls are taking a breather at these levels—or demanding results that reflect such steep multiples.
When it comes to tech companies’ forecasts, “anything less than mind-blowing is weak at the current valuations,” writes Ipek Ozkardeskaya, senior analyst at Swissquote Bank. Investors have piled into tech since the start of the year, “despite overbought market conditions and overstretched valuations,” he notes.
This earnings season “could well be a trigger for long-awaited profit-taking across the U.S. technology stocks,” he adds.
And that is exactly what seems to be happening today: Many shareholders are cashing out on those winnings, rather than keep rolling the dice.
“We have started to see more and more sell tickets across tech as many agree the easy money has been made,” Daniel O’Regan, managing director of equity trading at Mizuho Securities, wrote, noting there was plenty of profit-taking among tech stocks this week.
It doesn’t help that expectations for an interest-rate cut from the Federal Reserve in March have tumbled in recent weeks, given that how investors value future earnings from big tech is very sensitive to rates. On Wednesday afternoon, the Fed held rates steady, as expected, while noting that cuts could be on the horizon.
In fact, there’s a chance a more dovish central bank might not even be enough for tech to resume its gains—simply because the sector has become too expensive, some analysts say.
That doesn’t mean all is lost, of course. There were some bright spots in tech, like the great guidance from
Super Micro Computer,
a leading independent manufacturer of high-end AI servers for data centers. Chip maker
Advanced Micro Devices
boosted its 2024 sales guidance for its datacenter artificial-intelligence chip by a whopping 75%—although some on Wall Street had been wanting even more. (Talk about high expectations.)
And more results are coming that have potential to impress:
Amazon.com,
Apple,
and
Meta
will also report Thursday evening, with
Nvidia
slated for February. All four stocks, however, fell around 2% Wednesday.
This all leaves these remaining four Magnificent Seven firms under immense pressure to buck the season’s trend and deliver results worthy of the moniker. Some investors clearly aren’t willing to bet they can.
Write to Teresa Rivas at [email protected]
Read the full article here