(Bloomberg) — The stakes were already high for Big Technology heading into earnings season, and they were made even higher by the Nasdaq 100 Index’s worst week in three months.
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Big technology companies, which have driven U.S. stocks higher for most of this year, hit a wall this week. Investors, spurred by bets on Federal Reserve interest rate cuts, threats of further trade restrictions on chipmakers and concerns that hype around artificial intelligence may be overblown, shifted money from high-flying large-cap stocks to riskier, weaker parts of the market. AI darling Nvidia fell 8.8% this week, while Amazon.com Inc. fell 5.8%.
Wall Street is expecting slowing profit growth at big technology companies, and traders are pouring this year’s profits into cheaper areas, such as small caps that benefit from lower borrowing costs and sectors like health care where profits are expected to recover.Attention is turning to next week, when big technology companies start reporting quarterly results.
“There’s a lot of reasons to think tech stocks aren’t going to do very well over the next 12 months,” said Samir Samana, senior global market strategist at Wells Fargo Investment Institute. “At these levels, everything needs to go right.”
As the big announcements continue, the Nasdaq 100 is up 16% this year after dropping 4% this week — its biggest drop since April. The S&P 500 is up about 15% in 2024, with most of that gain coming from big tech stocks.
Alphabet starts reporting its group earnings on Tuesday, joining Tesla. Apple, Microsoft, Amazon and Meta Platforms are due to report next week. The whole group is benefiting from optimism about AI, and investors will want confirmation that the technology will impact profit and sales growth.
The “epic” turnaround by big tech companies will continue unless they can convince analysts to raise their revenue forecasts for the second half of this year and 2025, Goldman Sachs strategists David Kostin and others wrote in a client note on Friday.
“Once these companies don’t generate significant profits or revenue from AI and the impact of these ideas fades, stock prices will likely return to where they were a year ago,” Wells Fargo’s Samana said.
The big five U.S. technology companies — Apple, Microsoft, Nvidia, Alphabet and Amazon — are facing a tougher earnings cycle than last year’s stellar earnings cycle. The group’s profits are expected to rise 29% in the second quarter from a year earlier, according to data compiled by Bloomberg Intelligence.
That’s still strong, but down from the past three quarters, when the group’s overall growth was between 44% and 49%.The overall message from Wall Street is that earnings are expected to show companies are still doing well, but not as well as they did last year.
Google, Tesla
There are other themes investors will be digging into over the next week.
Google-parent Alphabet Inc., for example, offers a glimpse into the health of the digital-advertising market: The search giant is expected to post second-quarter profits of about $23 billion on revenue of $70.7 billion, up 25% and 14%, respectively, according to analysts’ average estimates compiled by Bloomberg.
With demand for electric vehicles slumping, money managers will be keen to hear from Tesla, which expects second-quarter profit to fall 37% to $1.7 billion and revenue to fall 1% to $24.6 billion.
That hasn’t dampened Tesla’s stock, which has risen nearly 70% since its April lows. Tesla investors are banking on Elon Musk’s promise of a robot taxi service, and after the company postponed an event originally scheduled for next month, investors are waiting on Tesla’s earnings call for details about the progress of its self-driving car initiative.
CrowdStrike Holdings, the cybersecurity company that caused a global IT outage on Friday, is not expected to report earnings until late next month.
Move up
Despite the recent sell-off, stocks like Nvidia and Meta Platforms are still surging ahead. Nvidia, which is due to report earnings later next month, has more than doubled this year, while Facebook’s parent company has risen by more than a third. As a result, many stocks remain expensively valued: Nvidia’s shares trade at 37 times projected 12-month earnings, while Microsoft and Apple both trade at more than 31 times.
The average valuation for the S&P 500 is 21 times. The Russell 2000 Index, a benchmark for small-cap stocks, trades at about 26 times forward earnings.
The technology sector is the only sector where valuations are above their historical averages, and analysts are still upgrading their forecasts, making it more likely that shortfalls will be punished, said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence.
“Failure in the technology sector is classified as an unforgivable sin in the current market because expectations are so high,” she said.
–With assistance from Ryan Vlastelica.
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