Big Tech faces earnings test after market rout

Big Tech Faces Earnings Test After Market Rout
Big Tech Faces Earnings Test After Market Rout

Summary

The Magnificent Seven stocks lost nearly $1 trillion in combined market value last week.

Strong earnings from big technology companies have pushed the stock market higher for more than a year. This time around, a sharp selloff has increased the pressure on the group to deliver.

The so-called Magnificent Seven stocks shed a combined $950 billion in market value last week, the largest on record. Microsoft fell 5.4% last week, its weakest since January 2023, while Nvidia had its worst week since September 2022. The S&P 500 has fallen 5.5% so far in April.

Earnings this week from several Magnificent Seven companies, including Tesla and Microsoft, offer the next opportunity for stocks to regain their footing.

Investors have flocked to tech stocks because they generally have offered superior growth prospects. The information technology sector is expected to increase earnings by 20% in the first quarter, according to analyst forecasts compiled by FactSet. They project 20% in communications services, which includes Meta and Alphabet. The S&P 500’s earnings are expected to grow by 0.5%.

Graphic: WSJ
View Full Image
Graphic: WSJ

The group’s fortunes matter a great deal. The Magnificent Seven stocks, which more than doubled on average in 2023, accounted for 29% of the S&P 500’s market value at the end of March, according to S&P Dow Jones Indices, the highest concentration in decades.

“If you own U.S. equities, you can’t ignore these companies,“ said Nael Fakhry, co-chief investment officer at Osterweis Growth and Income Strategy.

Tesla is scheduled to report earnings on Tuesday afternoon. Facebook parent Meta Platforms will follow on Wednesday, while Microsoft and Google parent Alphabet are set to weigh in on Thursday afternoon. Amazon.com and Apple will follow next week. The group also includes chip maker Nvidia, which is scheduled to report in May.

Netflix stock fell 9% Friday after issuing a softer revenue outlook than expected.

Tech stocks have benefited from surging enthusiasm for artificial intelligence technology and a belief that the U.S. economy was headed for a soft landing, meaning policymakers at the Federal Reserve could arrest high inflation without triggering a significant economic slowdown. That scenario would prompt the central bank to cut interest rates, boosting stocks.

Now, that forecast is in question. Consumer prices, which rose at a 3.5% clip over the 12 months ended in March, have run hotter than expected for three months in a row. Fed Chair Jerome Powell said last week that central bank officials aren’t ready to lower interest rates. The 10-year Treasury yield, a benchmark interest rate used to price everything from stocks to mortgages, settled at 4.613% Friday, up from 4.192% on March 28.

“With rates appearing to remain high for the foreseeable future, I think that dampens valuations across the market," said Fakhry, whose fund owns shares of Microsoft, Alphabet and Amazon.

Amazon trades at 38 times its projected earnings over the next four quarters, according to FactSet, while Tesla trades at 50 times. The S&P 500 trades at 20 times.

More than half of respondents in a BofA Securities survey of fund managers last week said owning Magnificent Seven stocks was the “most crowded" trade on Wall Street. Many investors perceive such herding as a sign of limited future upside.

Significant disappointment from market leaders could put the stock market at risk of a deeper selloff, said Bob Kalman, co-founder and senior portfolio manager at Miramar Capital. Other corners of the stock market, such as industrials and financials, offer better value, he said.

Nvidia has returned 54% this year, buoyed by blowout results in February. Tesla is down 41% this year, after it missed its forecast for vehicle deliveries.

“I just think people are starting to pick apart the Mag 7 for what they actually are," added Kalman. “Those that are beating and raising are doing well. Those that aren’t, are not."

Write to Charley Grant at charles.grant@wsj.com

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS