Can Big Tech Earnings in Q4 Repeat Q3’s Positive Performance?

After most big technology companies delivered bigger profits than anticipated in Q3, the markets are concerned about whether those companies can deliver similar positive results in Q4. Some of the big tech companies, including Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META), and Tesla (TSLA), all reported better-than-expected Q3 earnings but cautioned about their future outlooks.  The seven biggest tech stocks are down an average of -9% from their 52-week highs, and the future guidance for these stocks could determine the overall market's direction.

The outlook for many of the big technology companies has dimmed on signs of increased headwinds. Apple delivered a muted holiday outlook this year and expects flat sales this quarter, while Alphabet reported a smaller-than-expected profit in cloud computing.  Meanwhile, Meta Platforms warned that the year ahead is looking less predictable due to softer advertising spending by companies.  Tesla said rising interest rates and a more cost-conscious consumer are weighing on demand for its electric vehicles.

Despite the recent declines in the shares of big technology stocks, their valuations remain pricey.  According to Bloomberg data, shares of the seven biggest technology companies in the S&P 500 Stock Index ($SPX) (SPY) are priced at an average of 31 times projected profits.  That’s nearly twice the multiple of the other 493 stocks in the S&P 500.  Also, data from Bloomberg Intelligence shows the technology sector in the S&P 500 carries a nearly 36% premium to the index on a forward price-to-earnings basis.

Some analysts are concerned that there could be more stock price declines ahead for the big technology companies, which may have gotten ahead of themselves.  Advisors Asset Management said, “This is all about the failure of future guidance.  Big tech stocks were priced to historic perfection, leaving investors disappointed after those companies came up short.”  Advisors Asset Management said it has opted to own shares of Microsoft (MSFT) rather than some of the other big technology names on bets that Microsoft’s investment in AI is paying off. 

The S&P 500 last week rose +5.8%, its best week of the year after bond yields fell sharply when the Federal Reserve last Wednesday signaled that the recent surge in bond yields reduced the impetus to raise interest rates again.  Some analysts believe stocks could rally into year-end on easing interest rate concerns and positive seasonal trends.  Truist Advisory Services said, “We are in a better seasonal period for the market, with rates stabilizing, mixed economic data, and upbeat news on AI.”  However, Miramar Capital warns that “everything can change in a heartbeat if there is economic or geopolitical upheaval, which would directly impact stocks broadly that aren’t discounting the inherent dangers of a concentrated market in technology companies.” 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.