A searing revival in technology companies was supposed to collapse under its own weight and spell doom for investors everywhere. As of now, that’s not how it’s playing out.
Angst over earnings and lofty valuations has been building for a month. Hedge funds were net sellers in tech mega-caps during the previous five weeks ahead of earnings, unwinding about half of their year-to-date buying, according to data from Goldman Sachs Group's prime brokerage unit.
Now, uniformly strong earnings from Meta Platforms, Microsoft, Alphabet and Amazon are defying concerns weakening growth prospects would dent the world’s largest companies and leave the whole market vulnerable to reversal.
Bumper gains in the shares helped the S&P 500 creep to the top of its recent range and finish the month up 1.5 per cent.
“There’s a ubiquitous feeling large-cap tech did a great job managing their businesses. It’s a sigh of relief the market is breathing,” said Art Hogan, chief market strategist at B. Riley Wealth Management.
“An earnings apocalypse — that just doesn’t seem to be coming to fruition.”
Nervousness persisted into the beginning of this week, with the Nasdaq 100 suffering its biggest one-day drop in more than two months on Tuesday.
But after the close, Microsoft and Alphabet beat estimates on profit and revenue.
The results from the two companies closely associated with the Faang shorthand for big-tech, helped buoy the market through Wednesday’s Meta earnings.
The euphoria continued on Thursday, when the S&P 500 posted its largest daily gain since the first week of the year.
Stocks have now risen in three of the past five sessions despite reports showing economic growth slowing, inflation holding above forecasts and another regional bank teetering towards a government bailout.
It was a reprisal of buoyancy that has lifted shares all year at a time of significant uncertainty over how price pressures and the most aggressive Federal Reserve interest rate hikes in 40 years will affect the direction of the economy.
chief market strategist, B. Riley Wealth Management
To Kim Forrest, chief investment officer at Bokeh Capital Partners, the earnings reports highlight ways in which large-cap tech companies may weather the brewing economic storm.
Microsoft’s cloud-product revenue expanded in a sign that other businesses are still willing to spend on services. Meanwhile, Alphabet’s advertising revenue was unexpectedly strong.
“What this really says is that the environment is not making companies shrivel up, because most of this tech spending is probably from other businesses,” she said.
The gains of technology stocks this week sent the combined weightings of Apple and Microsoft in the S&P 500 to a record 14 per cent.
Add in Alphabet, Amazon, Meta and Nvidia, and nearly a quarter of every dollar put into the US equity benchmark is now split between just six names.
Exchange-traded fund flows this week indicate at least some traders are taking notice. More than half a billion dollars left an ETF that tracks three times the inverse performance of the Nasdaq 100.
Strong earnings from an industry that has been laying off workers accords with certain theories that hold a mild economic slowdown wouldn’t necessarily be ruinous for larger companies.
DataTrek Research argued in a note last week that in addition to potentially staunching inflation and ending Federal Reserve rate hikes, a recession could halt a years-long decline in worker productivity.
Investors aren’t bidding up stocks because they’re ignoring the risk of a recession, they’re actually embracing a slowdown on the hopes that it will increase labour force productivity and boost corporate margins, says Nick Colas, the company's co-founder.
After the last eight recessions, labour force productivity has grown by an average of 5.4 per cent, far outpacing the average of 2 per cent growth over the past six decades, according to Mr Colas.
To be sure, not everyone subscribes to a belief that Nasdaq companies beating Wall Street estimates bespeaks economic health.
While ahead of analyst predictions, first-quarter profits among S&P 500 companies are down from a year ago, including among technology companies.
And while large-cap stock indexes remain buoyant, gauges of their smaller brethren — viewed by many as a purer read on growth prospects — slid this week, with the Russell 2000 Index losing 1.3 per cent.
Additionally, stubbornly high inflation reinforces the case for more rate hikes from the Fed.
Going on-all in technology stocks may amount to a bet on an unprecedented turnaround in monetary tightening when the outlook is still uncertain.
“You have to really question ‘how is 24 times earnings going to hold up against a 10-year yield that seems like it’s drifting higher? Right now in the rates market, you have three cuts priced for the second half of the year. People who have been buying NDX have been buying explicitly those three cuts,” said Michael Purves, founder of Tallbacken Capital.
