- Despite remarkable earnings, technology companies have witnessed underwhelming stock market responses as the market has already priced in a buoyant outlook.
- The bond market and surging interest rates present additional obstacles to a stock rally.
The robust earning season for technology companies appears to be passing by largely unnoticed in a stock market that has already factored in an optimistic future. Despite the fact that approximately 89% of the tech companies within the S&P 500 Index have reported earnings that outstrip estimates, their stocks have witnessed an average decline of 0.8% the following day.
Valuations in the Spotlight
This fizzling rally comes as no surprise to industry observers such as Gregory Halter, Director of Research at Carnegie Investment Counsel. He asserts that the impressive stock gains earlier this year have driven valuations to levels reminiscent of when interest rates were near zero.
“To maintain these high valuations, you need exceptional, beyond-belief results,”
Halter explained, adding that it is rational to witness a pause and pullback in the current earnings season.
Communications services stocks have fared even worse, dropping an average of 2.4%, notwithstanding 16 out of 17 companies outperforming profit estimates.
Big players like Apple Inc. saw their shares drop in premarket trade on Friday despite beating revenue estimates. Worries surrounding the demand for its products, particularly iPhones, put a damper on their performance. In contrast, Amazon.com Inc.’s shares enjoyed a boost, thanks to their better-than-expected sales and profitability figures.
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Meanwhile, the Nasdaq 100, having posted a 40% gain this year and inflated valuations well beyond the 10-year average, has receded 3.1% from its July 18 peak as the earnings season began.
Challenges from the Bond Market
Another hurdle to the stock rally has emerged in the form of the bond market. The 10-year US Treasury yield reached a nine-month high on Wednesday, fueled by sturdy economic data and focus on the US’s growing fiscal deficits, especially after the country lost its AAA credit rating from Fitch Ratings. Tech stocks are generally more responsive to interest rates as these determine the present value of future expected profits.
As the second half of the year commences, many analysts are already adjusting their estimates upwards. Profits for the tech sector in 2023 are projected to fall by 7.9% compared to the expected 8.2% drop a month ago.
An interim halt in the rally could pave the way for further gains as estimates continue to climb, rendering valuations more appealing, says Michael Casper, an equity strategist with Bloomberg Intelligence. He posits that if tech multiples were to moderate a bit, it could significantly boost investor sentiment given the current apprehension about valuations.
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