Tech rally faces a reckoning ahead of tough earnings season

Tech rally faces a reckoning

The most recent MLIV Pulse survey reveals that this year’s 20% rise in US technology stocks is distancing itself from reality ahead of what is anticipated to be a sombre reporting season.

Despite the fact that investors have flocked to the technology sector despite the recent banking instability, analyst predictions for the sector’s quarterly profits to decline by the most since at least 2006 are at contrast with the rotation. About 60% of the 367 people surveyed by Bloomberg claimed that the share price increase had nothing to do with analysts’ estimates of earnings. The turmoil in the business, on the other hand, is likely to have hurt big banks’ profits, according to 41% of the participants.

Wei Li, global chief investment strategist at BlackRock Inc., stated in an interview in London that “the tech outperformance is a bit overdone and we’re not pursuing that indiscriminately.” “It’s not necessarily being driven by corporate fundamentals; it’s being driven by hopes that the Federal Reserve will start cutting rates when a recession becomes clear.”

The aftermath of Silicon Valley Bank’s collapse has given rise to conflicting narratives about the direction of markets and policy. Even as the Fed struggles with persistent inflation, growing recession fears are also fueling hope that the Fed will be compelled to halt its rate-hike campaign. Last month, US payrolls increased quickly and the unemployment rate dropped again close to record lows, which opened the door for the Fed to raise interest rates at its upcoming meeting.

Investors who have been hooked to economic data and Fedspeak for market indications should look forward to the reporting season as the next major driver. 60% of survey participants predicted that the earnings would cause the S&P 500 to decline, and according to statistics provided by Bloomberg Intelligence, analysts anticipate an 8% decline in member profits for the first quarter.

The impact of inflation and rising expenses still has capacity to affect profit margins, and that will happen this season, according to Li of BlackRock.

The threshold for disappointment is raised by such a strong survey consensus. Taking a contrarian stance is typically lucrative, even when the read across to positioning indicators may be a stretch. This is demonstrated by research using non-commercial CFTC data.

Vital technology

As the S&P 500’s 7% gain in the first quarter was mostly driven by a small number of the sector’s titans, the tech sector’s performance will be essential for the broader market. According to analysts, US technology earnings fell 15% in the three months ending in March as a result of rising prices and sluggish demand.

The industry is seeing widespread layoffs, which is an early symptom of a decline. Shares of Tesla Inc., which trade more like growth or tech stocks, fell last month as a result of investors’ disappointment over the electric car manufacturer’s modest increases in vehicle deliveries in the previous quarter.

According to Aneeka Gupta, a director at Wisdomtree UK Ltd., about a fifth of S&P 500 businesses have provided guidance on first-quarter results in recent weeks, with three unfavourable projections for every favourable one.

Tech equities appear to be costly as well. According to data gathered by Bloomberg, the Nasdaq 100 is trading at 24 times its anticipated earnings, which is significantly higher than its long-term average of 19 and the S&P 500’s multiple of 18.

According to more than a quarter of those who took part in Bloomberg’s survey, the tech rise would be halted by earnings. Just 14% anticipate more improvements.

Banking Unrest

Banks have lost popularity where technology has gained it. Investors’ primary attention throughout the earnings season will be on any effects of the recent failure of a few regional American lenders.

Almost 41% of individuals surveyed by MLIV Pulse believe the unrest will have an impact on the biggest banks’ earnings, compared to 31% who do not.

When they release their results on April 14, JPMorgan Chase & Co. and Citigroup Inc. will give a first impression. According to data provided by Bloomberg Intelligence, analysts continue to forecast a 4.2% profit growth for US financials in the first quarter.

We do not anticipate a wider impact affecting larger banks, given what we know now and the fact that recent financial concerns were triggered by liquidity problems – not credit problems “Ron Saba, senior portfolio manager at Horizon Investments, made the statement.

A third of those surveyed by MLIV Pulse believe that the biggest drawback this season will be a tightening of financial conditions. The next two greatest threats are a recession in the economy and excessive inflation.

While some recent data indicate a softening of price pressures, market analysts have cautioned that expectations for profit margins are still excessively high. Michael Wilson of Morgan Stanley is one such expert.

Over the next month, around 56% of participants anticipate that US Treasuries will do better than stocks.

The upcoming earnings season has the potential to frighten investors as high prices, an increasingly likely recession, and difficulty obtaining capital amid the banking sector crisis will all have a significant negative impact on the market “proclaimed Greg Bassuk, president and CEO of AXS Investments.

In the most recent study, 35% of participants were retail investors and 65% were professional investors.

The Bloomberg Markets Live team, which also manages a 24/7 MLIV Blog on the terminal, surveys readers of the Bloomberg Professional Service and website on a weekly basis. Click here to sign up for MLIV Pulse stories.

The MLIV Pulse survey this week focuses on the nature of work in the future. Would you advise young people who are graduating from high school this year to pursue a career in finance? Post your opinions here.