Technology stocks in the United States may have rallied at the start of this week, but industry denizens note that the 20% rally recently seen in tech stocks is not a reflection of the current state of the industry’s finances.
Much as investors appear to be snapping up big tech despite recent issues plaguing the banking sector, analysts have issued dire predictions about the biggest plunge in quarterly profits in the field since 2006.
BlackRock Inc global chief investment strategist Wei Li remarked that the strong performance of tech stocks in the past several days is most likely driven by the possibility that the US Federal Reserve will be cooling down its aggressive rate hikes in the face of a looming recession.
Many experts note that recent financial crises have essentially made it more difficult to predict the direction policy and markets will take. Indeed, despite the looming threat of a recession, it remains possible that the Federal Reserve could freeze its current rate-hike spree even as payrolls across the country have grown steadily and the unemployment rate continues to drop.
Could Earnings Reports End the Rally?
Over 25% of the financial and tech experts recently surveyed by Bloomberg share the opinion that the upcoming slew of quarterly earnings reports could throw a wrench into a seemingly unstoppable market rally. Likewise, only 14% have forecast gains for the foreseeable future.
Back in the first quarter, the S&P 500 gained around 7% thanks to great performances from several tech titans. However, industry earnings in the United States through March 2023 have dipped by around 15% as companies found themselves dealing with decreased demand as well as higher production and operational costs.
Likewise, recent massive layoffs in the tech sector are seen as an ill omen signifying a general slowdown. Case in point: electric vehicle maker Tesla’s shares fell early this month as the company’s dismal performance in terms of vehicle deliveries in the first quarter seemed to chill investor interest.
Many industry watchers also warn that tech stocks may now be too expensive to deal with. The technology-centric Nasdaq 100 is presently trading at 24 times greater than its forward earnings. Analysts note that this is well above the index’s long-term average of 19 and even the S&P 500’s multiple of 18.
It should also be noted that around one-fifth of the firms listed on the S&P 500 spent the past several weeks issuing guidance regarding their Q1-2023 earnings. According to Aneeka Gupta, director for asset management firm Wisdomtree UK Ltd, the overall scenario is grim as there are around three negative forecasts per a single positive one.