(Bloomberg) — A slew of better-than-expected earnings from technology companies after an ugly stock market selloff has made valuations in the sector a bit more appealing, luring in dip buyers ahead of another crucial week of the results season.
The Nasdaq 100 index is extending gains from Friday’s rally, showing that investors are willing to bet on fundamentals even as the fear of rising interest rates from the Federal Reserve is far from dissipating. The tug of war between the two has been fueling extreme swings in the Nasdaq 100. Trading at about 26 times forward earnings, the tech-heavy index is hovering at the cheapest valuation since May 2020.
When Google owner Alphabet Inc. and Facebook parent Meta Platforms Inc. report in the next couple of days, bulls will be hoping for a repeat of last week, when Apple Inc. and Microsoft Corp. rallied after strong results. So far, 93% of technology companies have beaten profit estimates by an average of 9%, in line with last quarter, according to data compiled by Bloomberg.
“The most important tech earnings season in a decade is now the focus of the Street and so far investors like what they see,” wrote Wedbush analyst Daniel Ives. The underlying growth for tech companies are being underestimated, he added.
Shares of Apple and Microsoft now are down less than 10% this year, outperforming broader indexes. Still, even with gains in those stocks last week, the Nasdaq 100 is likely to finish the month with its biggest January drop since 2008.
“As much as the tech earnings season has been fantastic and the companies that have reported have certainly been rewarded for beating estimates, it hasn’t been enough to overcome what’s happening in the broader market,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “We have to come back to the reality that rates are still rising.”
Read More: Nasdaq Poised for Worst January Ever as Pricey Tech Gets Crushed
Investors will have plenty more earnings data to digest this week with more than 100 companies in the S&P 500 reporting, including chipmaker Advanced Micro Devices Inc. and Snap Inc. The health of the digital-advertising market will be a key theme in the reports from Alphabet, Meta, Snap and Pinterest Inc.
While Alphabet and Meta shares have held up relatively well over the past month, Snap and Pinterest have been been hammered amid a renewed focus on valuations relative to profits. Snap is down 62% from a September record, while Pinterest has fallen 68% from a February peak.
For Thomas Digenan, lead equity investment specialist at UBS Asset Management, rising interest rates will continue to weigh on technology stocks. “What we’ve been seeing is a pullback in multiples,” he said in an interview. “As more rate increases are baked into the market, the companies that are being valued on earnings well into the future will continue to see multiple compression.”
Tech Chart of the Day
The Nasdaq 100’s pullback has combined with solid earnings to push valuations to the lowest level since May 2020. Still, the index’s forward price-earnings ratio is well above pre-pandemic levels. The benchmark rose as much as 2% on Monday.
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(Updates stock price performance throughout.)
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