The stakes were already elevated for technology giants heading into this earnings season. They just got a lot higher after the worst week for the Nasdaq 100 Index in three months.
After driving the rally in US stocks for most of the year, Big Tech slammed into a wall this week. Investors rotated from high-flying megacap shares to riskier, lagging parts of the market, spurred by bets on Federal Reserve interest-rate cuts, the threat of more trade restrictions on chipmakers and concern that the hype around artificial intelligence may be overblown. AI darling Nvidia Corp. sank 8.8% this week, while Amazon.com Inc. dropped 5.8%.
With Wall Street projecting that the tech behemoths’ profit growth is poised to slow, traders are plowing this year’s winnings into cheaper areas — like small-capitalization stocks caps that stand to benefit from lower borrowing costs, and sectors like health care, where earnings are expected to perk up. It’s all heightening the focus on next week, when major tech companies start reporting quarterly results.
“There are plenty of reasons to think tech will be less friendly over the coming year,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “At these levels, everything has to go right.”
Heading into the key stretch of announcements, the Nasdaq 100 is up 16% this year after this week’s 4% tumble, its steepest since April. The S&P 500 Index is up about 15% in 2024, with much of the advance generated by the largest tech stocks.
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Alphabet Inc. kicks off earnings for the cohort Tuesday, along with Tesla Inc. Apple Inc., Microsoft Corp. Amazon and Meta Platforms Inc. are due the following week. The entire group has benefited from AI-fueled optimism and investors will want some reassurance that the technology will move the needle for profit and revenue gains.
An “epic” reversal from Big Tech will continue unless the companies can convince analysts to raise their sales estimates for the second half of the year and 2025, Goldman Sachs strategists including David Kostin wrote in a note to clients on Friday.
“If these companies can’t generate meaningful profits and revenue from AI, and you remove the impact of that idea, then the stocks go back to where they were a year ago,” said Samana at Wells Fargo.
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The five biggest US technology companies — Apple, Microsoft, Nvidia, Alphabet and Amazon — are facing tough comparisons with the stellar earnings cycles of the past year. Profits for the group are projected to rise 29% in the second quarter from the same period a year earlier, data compiled by Bloomberg Intelligence show.
While still strong, that’s down from the past three quarters, when growth for the group ranged from 44% to 49%. The overall message from Wall Street: Expect results to show the companies are still booming, but not to the extent seen last year.
Google, Tesla
There are other themes investors will be drilling down into starting next week.
Google parent Alphabet, for example, will give a glimpse into the health of the digital advertising market. The search giant is projected to deliver profit of around $23 billion on revenue of $70.7 billion in the second quarter, up 25% and 14%, respectively, according to the average of analyst estimates compiled by Bloomberg.
And with electric-vehicle demand mired in a slump, money managers will be keenly interested in Tesla’s announcement. The carmaker’s profit is projected to shrink 37% in the second quarter to $1.7 billion, while sales are expected to decline 1% to $24.6 billion.
That hasn’t dampened the mood for the stock, which is up almost 70% from an April low. Tesla investors are pinning their hopes on Elon Musk’s promised robotaxi service. After the company postponed an event initially scheduled for next month, investors will be looking for details on Tesla’s earnings call about progress on the self-driving car initiative.
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CrowdStrike Holdings Inc., the cybersecurity company responsible for a global IT outage on Friday, isn’t expected to report earnings until late next month.
Way Up
Despite the latest declines, stocks like Nvidia and Meta Platforms are still sitting on big gains. Nvidia, which is expected to report late next month, has more than doubled this year while Facebook’s owner has advanced more than a third. As a result, valuations for many remain stretched. Nvidia is priced at 37 times projected profits for the next 12 months, while Microsoft and Apple both trade at more than 31 times.
The average valuation for the S&P 500 is 21 times. The benchmark for small-cap shares, the Russell 2000 Index, trades at about 26 times estimated profits.
The tech sector is the only segment where valuations are above historical averages and analysts have still been revising estimates higher, according to Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. That’s created a situation where misses are likely to be punished, she said.
“A miss in tech is to be classified as an unforgivable sin in the market right now because expectations are so high,” she said.
