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The markets are hoping that positive earnings results from the megacap technology companies will lift the stock market from its recent doldrums. The surge in the 10-year T-note yield to above 5% for the first time since 2007 has weighed heavily on technology stocks, with the S&P 500 ($SPX) (SPY) and Nasdaq 100 ($IUXX) (QQQ) stock indexes falling to 4-1/2 month lows on Monday. Investors are counting on solid earnings results from Alphabet (GOOGL) and Microsoft (MSFT) after today’s close to help restart a rally in equity markets.
With headwinds increasing and market uncertainty rising, investors have flocked to the relative safety of megacap technology stocks. Rising interest rates have made already stretched tech valuations look even more expensive just as the U.S. and China step up regulatory restrictions against each other. According to Bank of America, piling into big technology stocks remains the most crowded trade among fund managers.
The cost to hedge downside risk in big tech stocks is increasing, with more fund managers overweighing a handful of megacap technology stocks. The costs of put options, which protect against price declines in a stock, have risen relative to the cost of call options for megacap tech shares. That signals investors are increasingly seeking protection from share-price drops in the near term. That’s a reversal from earlier in the year when investors were chasing the upside in megacap technology stocks, pushing up their call options' prices.
The five biggest megacap technology stocks in the S&P 500 Stock Index have generated the bulk of the index’s 10% gain this year. The earnings have been a major supportive factor for this year’s gains. According to Bloomberg Intelligence, the five biggest megacap tech stocks are expected to post 34% profit growth in Q3. The rest of the stocks in the S&P 500 are expected to show a profit decline of about 5% for Q3. Investors hope the earnings results from the megacap tech stocks will push the market higher and justify their frothy valuations.
Microsoft and Alphabet are seen as front-runners in generative artificial intelligence. So far, the technology hasn't been a significant contributor to earnings. However, analysts are expecting that to change in the coming year, making forecasts increasingly crucial. CI Roosevelt said, “We’re looking for reasons for the market to turn around and start to advance again. Given how prominent big technology companies are in terms of contribution to total earnings, the reports for big tech earnings could be a catalyst to turn the market positive.” Boston Partners said, “There is no room for them to falter whatsoever. If you think about the amount of money that’s gone into index investing, particularly in the S&P 500, if any one of these companies falter, then there’s going to be selling pressure because everyone and their brother is overweight.”
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.
