Tech Earnings Season Disappoints as Stock Market Fails to Reward Strong Results
The technology sector has been delivering impressive earnings this season, with many companies surpassing profit estimates. However, the stock market has failed to reward these strong results, causing some confusion among investors. Despite the majority of technology companies beating earnings expectations, their stocks have fallen by an average of 0.8% the day after reporting, according to data from Bloomberg.
This subdued response from the stock market is not surprising to experts, considering the significant gains that many tech stocks have experienced this year. These gains have pushed valuations to levels not seen since interest rates were near zero. According to Gregory Halter, director of research at Carnegie Investment Counsel, for these valuations to be sustained, companies would need to deliver incredible results. Therefore, the current market pause and pullback are not unexpected.
Communication services stocks have been even less fortunate, falling by an average of 2.4% despite most companies exceeding profit expectations. Apple, for instance, saw its shares drop by as much as 4.1% despite beating revenue estimates. Concerns over demand for its devices contributed to the decline. In contrast, Amazon.com’s better-than-expected sales and profitability sent its stock soaring by as much as 10%.
The Nasdaq 100, which has seen a remarkable 40% increase this year, is down 3.2% from its peak on July 18th, when earnings season began. Michael Casper, an equity strategist with Bloomberg Intelligence, attributes the lack of enthusiasm from traders to many of these earnings beats already being priced into the market.
Another obstacle to the stock rally comes from the bond market. The recent rise in the 10-year U.S. Treasury yield, coupled with concerns over the nation’s expanding fiscal deficits, has created uncertainties. Technology stocks are particularly sensitive to interest rates, as they heavily rely on future profit expectations.
Despite these challenges, analysts have started increasing their estimates for the tech sector in the second half of the year. Projections for 2023 now anticipate a 7.9% decline in profits compared to the previous estimate of an 8.2% drop. This adjustment, along with the current pause in the stock rally, may pave the way for future gains and make valuations more attractive to investors.
According to Bloomberg Intelligence’s Casper, if tech multiples were to moderate slightly, this could significantly boost investor sentiment. Many market participants are particularly concerned about current valuations, and a minor adjustment could alleviate some of these worries.
In other news, several major tech companies are facing different challenges. Apple posted its third consecutive quarter of declining sales and expects a similar performance in the current period due to weak industry demand for their products. Alphabet, the parent company of Google, is facing allegations that it illegally terminated contract employment for a majority of its Google Help workers as they were attempting to unionize.
Additionally, Apple, Samsung, and HP have halted new imports of laptops and tablets to India after the country abruptly banned inbound shipments without a license. In the advertising industry, WPP shares dropped after the company lowered its revenue guidance for the year. The CEO cited lower sales from tech clients in the U.S. as the reason for this unexpected development.
Lastly, in South Korea, a relatively unknown circuit board maker is capitalizing on investor interest in artificial intelligence, experiencing significant financial gains. As technology giants’ shares soar, this smaller company is reaping the rewards.