This year’s rally of more than +20% in with the Nasdaq 100 Stock Index ($IUXX) (QQQ) will be tested by results from the Q1 earnings season that begins later this week. Technology stocks rallied sharply in Q1 as investors rotated out of financial stocks amid the turmoil in the banking sector. However, Q1 quarterly profits for the S&P 500 information technology sector are expected to fall -14.9%, the biggest drop for the sector since at least 2006.
Some gains in technology stocks this year have been driven by expectations that a slowdown in the economy will force the Federal Reserve to pause its rake-hike campaign. BlackRock said, “The tech performance is being driven by expectations the Fed will start cutting rates as a recession becomes evident, and not necessarily by company fundamentals.” BlackRock warns that “the impact of inflation and higher costs still has room to hit profit margins, and that will come through this season.”
The Q1 earnings results will be a significant catalyst for the near-term direction of stocks. However, early indications don’t bode well, with broad layoffs in the technology sector signaling a slowdown. About 20% of the S&P 500 companies have issued guidance on first-quarter results recently, with three negative forecasts for every positive one, according to Wisdomtree UK Ltd. A poll taken by MLIV Pulse shows that 33% of respondents said that the biggest negative factor this earnings season would be a further tightening in financial conditions, followed by an economic slowdown and high inflation.
The rally in the S&P 500 ($SPX) (SPY) of more than +7% this year has been powered by sharp gains in several mega-cap technology stocks. Although some recent data has shown an easing in price pressures, Morgan Stanley warns that profit margin expectations are still too high and that “guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes.”
According to data compiled by Bloomberg, technology stock valuations look expensive, with the Nasdaq 100 Stock Index trading at 24 times its forward earnings, well above its long-term average of 19 and the S&P 500’s multiple of 18. Moreover, according to AXS Investments, “The upcoming earnings season has the potential to send shivers among investors as high prices, an increasingly likely recession, and difficulty accessing capital amid the banking sector debacle will all weigh heavily on the market.”
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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.
