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.
(Bloomberg) — 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.
Top Tech Stories
- Amazon is the world’s first public company to lose a trillion dollars in market value as a combination of rising inflation, tightening monetary policies and disappointing earnings updates triggered a historic selloff in the stock this year.
- Apple has limited the AirDrop wireless file-sharing feature on iPhones in China after the mechanism was used by protesters to spread images to other iPhone owners.
- Apple has hired Timothy Campos, a startup founder and former Facebook executive to run its information systems group after departures in that department, according to people with knowledge of the matter.
- Hon Hai Precision Industry Co., maker of most of the world’s iPhones, warned consumer electronics revenue will fall this quarter as it grapples with a Covid outbreak that walled off its main production base in central China.
- Meta’s first major job cuts won’t be nearly enough to get the company back to being as profitable as it was just two years ago, according to analysts.
- Key chip-equipment supplier Tokyo Electron Ltd.
slashed its full-year outlook after memory makers cut spending and the US ramped up restrictions on cutting-edge chip-gear exports to China.
- Taiwan Semiconductor Manufacturing Co. posted a 56% increase in sales for October, signaling the world’s largest contract chipmaker continues to weather a broader slowdown in electronics demand.
- Disney just suffered its worst one-day rout in 21 years.
Warner Bros. Discovery Inc., Lions Gate Entertainment Corp. and AMC Entertainment Holdings Inc. are all trading for less than $10. Paramount Global — the home of MTV, CBS and Top Gun: Maverick — has lost half of its value this year.
In a matter of months, Hollywood’s feel-good streaming story has turned into a horror show.
- Rakuten Group Inc. is reducing headcount at its mobile unit and seeking outside investors to help turn around the loss-making business, according to people familiar with the matter.
–With assistance from Subrat Patnaik.
(Updates to market open.)
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