NEW YORK, Jan 20 (Reuters) – A flurry of earnings reports in the coming weeks will test the recent rebound in technology and other megacap stocks, a category whose leadership in US markets has declined after last year’s sharp sell-off has faltered.
The tech-heavy Nasdaq 100 Index (.NDX) is up nearly 6.2% in 2023, compared to a 3.45% gain for the S&P 500 (.SPX). Shares of some megacap companies — including those grouped outside of tech in sectors like communications services and consumer discretionary — have soared, with Amazon (AMZN.O), Meta Platforms (META.O) and Nvidia ( NVDA.O) twice as high -digit percentage increases.
Several factors are driving this outperformance, including investors piling into stocks they believe have been overly penalized in 2022. A moderation in bond yields, whose rise over the past year has put tech stock valuations particularly under pressure, is also likely to help the group, investors said.
Now, however, the focus is shifting to whether these companies can withstand a widely anticipated economic downturn while supporting valuations that some investors believe are overpriced.
“To keep this recovery going, the outlook for 23 has to be less bad than expected,” said Peter Tuz, president of Chase Investment Counsel, whose firm recently divested its holdings in Apple (AAPL.O) and Microsoft (MSFT.O). .
Tech and growth stocks led US stock markets for years after the 2008 financial crisis, helped by near-zero interest rates. They struggled alongside broader markets last year as the Federal Reserve hiked interest rates to combat rising inflation, and some investors doubt they will regain market pole position any time soon. The Nasdaq 100 fell 33% in 2022, while the S&P 500 lost 19.4%.
The top six stocks by market value at the end of 2021 — Apple, Microsoft, Alphabet (GOOGL.O), Amazon, Meta, and Tesla (TSLA.O) — have lost a collective weight in the S&P 500 from 25% to 18%. according to Strategas Research Partners.
This dynamic mirrors a pattern seen after the market’s dot-com bubble burst after the turn of the century. According to Strategas, the collective weight of the six largest stocks in the S&P 500 at the time fell from a multi-year peak of 17% to 5%.
“This lead reduction…is being measured in years, not months or quarters,” said Chris Verrone, head of technical and macroeconomic research at Strategas.
Megacap stocks as a percentage of the S&P 500
INCOME TEST
Companies that account for more than half of the S&P 500’s market value are due to report results over the next two weeks, including Microsoft, the second largest US company by market value, on Tuesday, Elon Musk’s Tesla and IBM (IBM.N) on Wednesday and Intel (INTC.O) on Thursday. Apple, the largest US company by market value, and Google parent Alphabet report the following week.
According to Refinitiv IBES, earnings in the technology sector are likely to have declined 9.1% year over year in the fourth quarter, compared to a 2.8% decline in S&P 500 earnings overall.
A key question for many megacaps that were once heralded for their stellar growth is whether they can significantly increase sales and profits while cutting costs in the face of a potential recession.
Alphabet Inc (GOOGL.O) said Friday it was shedding about 12,000 jobs, or 6% of its workforce, the latest tech giant to announce layoffs. Microsoft on Wednesday said it would cut 10,000 jobs, while Amazon began notifying employees about its own job cuts of 18,000 people.
“The biggest plus could be if they could demonstrate cost control while maintaining at least decent growth intact,” said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey. “It’s a tough balancing act.”
Reuters graphics
Valuations for technology and megacap companies have softened after last year’s sell-off but are still ahead of the broader market. The technology sector of the S&P 500 still trades at a premium of about 19% to the broader index, according to Refinitiv Datastream, up from its 7% average over the past 10 years.
Still, some investors are reluctant to bet against tech stocks.
The Wells Fargo Investment Institute ranks technology as one of its favorite US sectors.
The company anticipates an economic downturn and believes many tech companies have businesses that are resilient to economic uncertainty, said Sameer Samana, a senior global market strategist there.
“It’s just too important and too big a weight not to participate,” Samana said. “But the years where we easily outperformed the S&P are probably behind us now.”
reporting by Lewis Krauskopf; Edited by Ira Iosebashvili, John Stonestreet and Daniel Wallis
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