It’s one of the biggest weeks of the year for tech earnings, so much so that the Federal Reserve’s rate decision on Wednesday could be a bit overdue.
Economists expect the central bank to raise interest rates by another 75 basis points as it seeks to combat rising inflation. While higher rates have been the main headwind for tech stocks this year, investors say the policy path is now priced in, especially as consumer inflation expectations are falling, suggesting the Fed may be less hawkish.
Two tech giants are giving investors reason for optimism: Microsoft Corp late Tuesday gave an encouraging sales forecast, while Alphabet Inc, Google’s parent company, reported flexible advertising revenue. The Nasdaq 100 rose 1.5 percent, with Microsoft adding 3.7 percent and Alphabet 3.2 percent.
Jack Janasevic, senior portfolio analyst at Natixis Investment Managers, who has been profit-taking on energy stocks and a shift to technology, said clients were also demanding in addition to the sector.
Janasiewicz added, because the Fed is a known quantity, profits will be critical to the market. It focuses on how margins hold up amid inflation, and how low consensus estimates need to be.
The Nasdaq 100 is up 10% from its June low, and recently broke above the 50-day moving average for the first time since April, a positive sign for near-term momentum. It is on track for its biggest one-month percentage gain since October but is still down about 25% this year.
The yield on the 10-year Treasury is below 2.8%, down from the June peak of about 3.5%.
The Fed meeting comes in a profit-filled week. Apple Inc, Amazon.com Inc and Meta Platforms Inc, Facebook’s parent company, are due to report this week.
So far this earnings season, about 80% of technology companies in the Nasdaq 100 have reported better-than-expected earnings and returns, according to data compiled by Bloomberg.
Of course, the macroeconomic background remains a major factor behind earnings and corporate outlook. Matt Calkins, CEO of enterprise software company Appian Corp., is so concerned about inflation that he wants the Fed to be very aggressive, raising rates by 100 or 125 basis points.
“We either need to put inflation back in the fund again, to 2% again, or we’ll end up with some kind of long-term acceptance of higher inflation,” he said in a phone interview. Recession is inevitable, he said, and “the main issue is whether we still have inflation on the other end.”
Some investors are also concerned that earnings and stock price estimates do not yet reflect the full impact of a slowing economy caused by rising interest rates. The Nasdaq 100 is trading at a forward earnings of 20.8 times, just above the 10-year average.
However, if the consensus estimates continue to fall, as expected, this multiplier could be deceptively low. Last week, Bank of America Corp. warned that the tech sector has not entered a full-fledged recession, and that it may have another room to fall.
Anthony Saglimpin, global market strategist at Ameriprise Financial, said technology stocks still look expensive, and that there are a number of downside risks.
“Technology probably can’t move very high as long as the Federal Reserve is aggressively raising interest rates,” he said, adding that it burdens the sector with its long-term prospects. “If the market is wrong about the economy going into recession, I think you’re going to see tech growth that really drives up.”
Cross currents between the overall background and how companies perform in it reinforce how pivotal this earnings season can be for the market outlook.
Nicholas Colas, co-founder of DataTrek Research, was candid in his assessment of what will drive trading. “Only profits really matter,” he wrote. “The other issues are just side effects of that main narrative.”
Technical chart for today
Shares of Uber Technologies Inc, which rose 13% in July, are poised for their first monthly gain in 2022. Shares of giant Uber Technologies Inc are down 45% this year as the company has tried to manage a driver shortage by offering them incentives.
While demand has rebounded with the travel boom, higher fuel prices are making prices more expensive for customers and reducing profits for their drivers. Uber is due to announce its second-quarter results on August 2.
The most important technical stories
- Alphabet, Microsoft and Texas Instruments reported double-digit quarterly revenue growth Tuesday and expressed optimism about the coming months, reassuring investors who had been worried the tech industry was preparing for a difficult second half.
- Alphabet, Google’s parent company, reported second-quarter revenue that met analyst expectations, reflecting the internet giant’s resilience amid slowing growth in advertising.
- Microsoft provided an upbeat sales forecast for the fiscal year just beginning, easing investor concerns about growth that erupted after a lackluster fourth-quarter earnings report.
- Texas Instruments, the maker of chips used in everything from washing machines to satellites, has given a bullish forecast for the current period, countering concern that a slowing economy is hurting demand for electronics.
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