The best thing for bulls this year is that the shares of the largest tech companies are going up. It’s about to hit earnings season, when tech companies are likely to report the biggest drop in profits in more than a decade.
Almost all of the S&P 500’s 7% gain this year can be attributed to Apple Inc., Microsoft Corp., and other megacaps. This is because turmoil in the banking industry has caused investors to flock to what they see as safe investments. Profits are expected to drop 15% in the first quarter, so investment professionals are getting ready for a big drop if the big companies don’t do better than expected.
“Tech has been killing it, but we’re at a turning point now,” “Philip Orlando, Federated Hermes’s chief equity market strategist, said this. “It looks like earnings are going down, and prices are too high. There are a lot of things that worry me, and if guidance or the macro or something else goes wrong, these stocks could get crushed.”
This year, Apple, Amazon.com, and Alphabet are all up about 20%, which is more than the Nasdaq 100’s rise of 19%. Nvidia Corp., Tesla Inc., and Meta Platforms Inc. are all up even more, from 50% to 88%. Mislav Matejka, who is in charge of strategy at JPMorgan, said that the group seems to be overbought.
Earnings from tech companies are expected to drop the most in the first quarter since 2009. For the period, earnings for the S&P 500 Index are expected to be down 8%. Consensus has been getting worse over time. Six months ago, analysts thought that earnings in the tech sector would go up by 1%.
The biggest companies are getting less praise than they used to. Over the past three months, the average estimate of how much Apple made in the quarter that just ended has dropped by 4.4%. At Microsoft, the same thing is happening, and analysts are lowering their predictions for the whole year.
The worsening outlook is due to a number of negative factors, such as slower economic growth, more interest rate hikes by the Federal Reserve to fight inflation, and trouble in the banking sector that could make it harder for businesses to get loans. But these worries aren’t showing up in stock prices, where a rally has pushed price-earnings ratios to high levels. Last quarter, 85% of tech companies in the S&P 500 made more money than expected, compared to 69% of the other companies in the S&P 500. In terms of revenue, only 56% of tech stocks beat, compared to 58% for the S&P.
When estimates go down and prices go up, valuations go up. This is especially true when you consider that the International Monetary Fund’s forecast for global economic growth over the next five years is the weakest it has been since 1990.
Apple is worth 26 times its expected earnings, which is more than its 10-year average of 18 times. Microsoft is also more expensive than its long-term average, and both are above the 24 multiple of the Nasdaq 100, which is itself more expensive than its long-term average. In comparison to the benchmark as a whole, the forward earnings multiple of the S&P 500 Information Technology Index recently hit its highest level since 2005.
“In order for this price to be fair, you really need to see earnings,” “Jeffrey Buchbinder, who is the chief equity strategist for LPL Financial and is in charge of more than $1.1 trillion, said this. “Right now, it’s a show-me story, and given how good the run has been, misses will be punished. This is a valuation-driven rally, and when that happens, a stock can make quick gains.”
Nvidia has been the best-performing part of the Nasdaq 100 Index in 2023. Its stock price has gone up 88%, making it the best-performing part of the index. The surge is a lot bigger than the index’s 19% gain and the Philadelphia Stock Exchange Semiconductor Index’s 24% gain. A lot of Nvidia’s progress has been due to interest in technology for artificial intelligence.
Source: Team CurrencyVeda