Tech bulls are grappling with a new reality: breakneck profit growth is no longer something they can count on.
Analysts are becoming more glum on tech earnings as weaker-than-expected results and guidance from the likes of Amazon.com and Apple, along with a new era of rising interest rates, cast doubt on what has been the market’s most long-standing growth narrative.
Analyst estimates for 12-month forward earnings-per-share for stocks on the Nasdaq 100 Index fell about 0.2% last week on aggregate. That was the first drop in weekly estimates since December. The same measure for S&P 500 company earnings, meanwhile, rose about 0.1%.
Recent quarterly results represent the “end of euphoria” for tech, Savita Subramanian, head of US equity and quantitative strategy at BofA Securities, said in a 1 May report, with the sector’s weakness among the most notable trends of the quarter.
Numerous factors have been weighing on tech sentiment this year, including fears of an economic slowdown, the impact of surging inflation on consumer demand and — perhaps most crucially — the start of what is expected to be a series of US Federal Reserve rate hikes. Fed officials meeting this week are widely expected to deliver a 50 basis point increase, with higher rates especially negative for tech stocks valued on future growth expectations.
Less-than-stellar results from some of the Nasdaq 100’s biggest companies have also hurt. Last week, Amazon plunged in an historic rout amid slowing e-commerce growth and disappointing forecasts, while shares in Apple also dropped after the iPhone maker warned that supply constraints would hurt sales by billions of dollars. Alphabet also released first quarter revenue that fell short of analysts’ expectations.
Lower price targets
And analysts aren’t just cutting profit expectations. They’re also lowering their price targets for tech stocks. The Nasdaq 100’s 12-month price target — calculated by aggregating the average targets of its constituents — fell by 2.3% last week, the biggest weekly drop since late 2008. It was also the 10th straight week of declines for that measure, something that hasn’t happened since US stocks tumbled to close out 2018.
“Tech and other growth stocks are facing a double whammy, with earnings growth that’s underwhelming and valuation compression that’s overwhelming,” said Mona Mahajan, senior investment strategist at Edward Jones.
Still, with the Nasdaq 100 already down 20% year-to-date, she remains positive on tech in the longer term.
“We think a large part of the correction has now occurred, and valuations have become more interesting,” she said in a phone interview. “As we look out 12 months, we expect that either economic growth will be slowing, or that inflation will be. In either scenario, tech should be back in favour.” — Ryan Vlastelica, (c) 2022 Bloomberg LP