(Bloomberg) — A searing revival in technology companies was supposed to collapse under its own weight and spell doom for investors everywhere. As of now, that’s not how it’s playing out.
Most Read from Bloomberg
Angst over earnings and lofty valuations has been building for a month. Hedge funds were net sellers in tech mega-caps during the previous five weeks ahead of earnings, unwinding about half of their year-to-date buying, according to data from Goldman Sachs Group Inc.’s prime brokerage unit.
Now, uniformly strong earnings from Meta Platforms Inc., Microsoft Corp., Alphabet Inc. and Amazon.com Inc. are defying concerns weakening growth prospects would dent the world’s largest companies and leave the whole market vulnerable to reversal. Bumper gains in the shares helped the S&P 500 creep to the top of its recent range and finish the month up 1.5%.
“There’s a ubiquitous feeling large-cap tech did a great job managing their businesses. It’s a sigh of relief the market is breathing,” said Art Hogan, chief market strategist at B. Riley Wealth Management, in an interview.“An earnings apocalypse — that just doesn’t seem to be coming to fruition.”
Nervousness persisted into the beginning of this week, with the Nasdaq 100 suffering its biggest one-day drop in more than two months Tuesday. But after the close, Microsoft Corp. and Alphabet Inc. beat estimates on profit and revenue. The results from two firms closely associated with the Faang shorthand for big-tech, helped buoy the market through Wednesday’s Meta earnings. The euphoria continued Thursday, when the S&P 500 posted its largest daily gain since the first week of of the year.
Stocks have now risen in three of the last five sessions despite reports showing economic growth slowing, inflation holding above forecasts and another regional bank teetering toward a government bailout. It was a reprisal of buoyancy that has lifted shares all year at a time of significant uncertainty over how price pressures and the most aggressive Federal Reserve interest-rate hikes in 40 years will affect the direction of the economy.
To Kim Forrest, chief investment officer at Bokeh Capital Partners, the earnings reports highlight ways in which large-cap tech companies may weather the brewing economic storm. Microsoft’s cloud-product revenue expanded in a sign that other businesses are still willing to spend on services. Meanwhile, Alphabet’s advertising revenue was unexpectedly strong.
“What this really says is that the environment is not making companies shrivel up, because most of this tech spending is probably from other businesses,” she said.
The gains of technology stocks this week sent the combined weightings of Apple Inc. and Microsoft in the S&P 500 to a record 14%. Add in Alphabet, Amazon, Meta and Nvidia Corp., and nearly a quarter of every dollar put into the US equity benchmark is now split between just six names.
ETF flows this week indicate at least some traders are taking notice. Over half a billion dollars left an exchange-traded fund that tracks three times the inverse performance of the Nasdaq 100.
Strong earnings from an industry that has been laying off workers accords with certain theories that hold a mild economic slowdown wouldn’t necessarily be ruinous for larger companies. DataTrek Research argued in a note last week that in addition to potentially stanching inflation and ending Federal Reserve rate hikes, a recession could halt a years-long decline in worker productivity.
Investors aren’t bidding up stocks because they’re ignoring the risk of a recession, they’re actually embracing a slowdown on the hopes that it will increase labor force productivity and boost corporate margins, says Nick Colas, the firm’s co-founder. After the last eight recessions, labor force productivity has grown by an average of 5.4%, far outpacing the average of 2% growth over the last six decades, according to Colas.
To be sure, not everyone subscribes to a belief that Nasdaq companies beating Wall Street estimates bespeaks economic health. While ahead of analyst predictions, first-quarter profits among S&P 500 companies are down from a year ago, including among technology firms. And while large-cap stock indexes remain buoyant, gauges of their smaller brethren — viewed by many as a purer read on growth prospects — slid this week, with the Russell 2000 Index losing 1.3%.
Additionally, stubbornly high inflation reinforces the case for more rate hikes from the Fed. Going on-all in technology stocks may amount to a bet on an unprecedented turnaround in monetary tightening when the outlook is still uncertain.
“You have to really question ‘how is 24 times earnings going to hold up against a 10-year yield that seems like it’s drifting higher? Right now in the rates market you have three cuts priced for the second half of the year. People who have been buying NDX have been buying explicitly those three cuts,” said Michael Purves, founder of Tallbacken Capital.
–With assistance from Lu Wang.
Most Read from Bloomberg Businessweek
©2023 Bloomberg L.P.
Add Comment