Wall Street has given up on the hope that technology companies will report higher earnings next year, potentially setting up their shares to at least stabilize if not stage a short-term rally now that the third quarter reporting period is winding down.
The drop in the outlook has already been precipitous. Analysts now see profits for the industry declining 0.2% next year, compared with a prediction in late June for an increase of 10.5%, according to data compiled by Bloomberg Intelligence. While expectations have come down across a number of sectors, tech stands out: The overall S&P 500 is still expected to report earnings growth in 2023.
The worsening earnings outlook is a big reason for the Nasdaq 100 Index’s 34% drop this year, but some market watchers are optimistic the worst of the negative revisions are over for now, as investors have fairly up-to-date reads on corporate fundamentals and Federal Reserve monetary policy. A number of companies, notably Meta Platforms Inc., also are cutting costs through layoffs or other means, a trend that should support profits and margins.
The Nasdaq 100 surged 4.7% on Thursday, supported by a bullish reading on inflation.
“We’re through the Fed meeting, the midterms, and the bulk of the earnings season, so there’s no obvious catalyst for why estimates should move too much lower in the near term,” said Michael Casper, US equity strategist at Bloomberg Intelligence. “It seems safe to say that tech expectations were in a bit of a bubble, but they’ve been reset.”
The earnings season was a mixed one for tech, especially the largest companies that dominate major indexes. Microsoft Corp., Alphabet Inc., Amazon.com Inc., and Meta all sank following their results, and analysts as a result reduced their estimates for 2023 earnings per share. Microsoft estimates have fallen 5.9% over the past quarter, while they are down 7.8% for Alphabet, 14% for Amazon and 29% for Meta.
Apple Inc., however, was an exception. It was a bright spot among megacap earnings, and despite growing concerns about its iPhone business, it has also been an exception in terms of estimates, which have only come down 2.7% over the past three months.
If Apple follows the rest of tech in seeing negative revisions, that would have implications for valuations, especially as it is the biggest US company and trades at a premium to the market and its own history. The Nasdaq 100 trades at 19.4 times estimated earnings, a modest discount to its 10-year average of 20.4. If estimates are slashed further, shrinking the denominator in the price-to-earnings equation, the index would screen as more expensive than it currently does.
And should rising inflation and higher interest rates trigger another leg down in global economic growth, analysts may need to cut estimates further in 2023.
“While I wouldn’t want to own big tech at the weight I used to, I would be more comfortable owning them if I knew the last estimate cuts were in,” said Patrick Burton, a portfolio manager at Winslow Capital Management. “Valuations are starting to look more attractive, but I don’t think estimates have bottomed. It could be a multimonth process until we get more visibility about 2023, and it may not be until next year is half over that we start to see more relative outperformance.”
Tech Chart of the Day
Walt Disney Co. sank 13% on Wednesday, the biggest one-day loss for the media company in more than 20 years. The selloff followed weaker-than-expected results, including at its Disney+ streaming-video service, where losses more than doubled. Shares ended at their lowest since March 2020.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Ryan Vlastelica
