Nasdaq 100, the tech-heavy index, has already fallen by 21 per cent over the last 1 year and is down by 4.71 per cent YTD. Technology stocks enjoyed high valuations during an easy-money environment. Now, when the interest rate scenario has reversed, the tech stocks are the biggest casualty. The recent pullback in the tech sector has taken down valuations for the space to pre-Covid levels.
As per a report by Zacks Investment Research, the Zacks Tech sector is currently trading at 20.9X forward 12-month EPS estimates, which is roughly -27% below where the sector traded at the start of the year and about where the sector was trading at the end of 2019.
Tech sector is the biggest earnings contributor to the S&P 500 index, bringing in roughly a quarter of the index’s total earnings. As such, Tech earnings have broad implications.
Technology stocks have been at the receiving end of the ongoing market reset in response to the Fed’s tightening policy. The ‘long duration’ nature of many Tech companies, with the bulk of their profitability way out in future years, left them vulnerable to rising interest rates.
Technology sector earnings
The sector’s earnings also paints a gloomy picture. Zacks Tech sector is expected to earn -8.8% less earnings in 2022 Q2 compared to the year-earlier period on +2.7% higher revenues. This means that the sector will suffer another quarter of margin compression in Q2, after going through the same thing in 2022 Q1, when earnings were up +4.5% on +8.8% higher revenues.
Total Q2 earnings for the Big 5 Tech players – Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) , Meta (FB) and Microsoft (MSFT) – are expected to decline -16.2% from the year-earlier level on +6.9% higher revenues. This would follow the -8.4% earnings decline on +11.4% revenue growth in 2022 Q1. The ‘Big 5’ earnings growth is expected to resume next year, after declining this year – says the report.
Continued negative sentiment on the sector would imply that the market is very skeptical of these earnings expectations and thinks they are at risk of negative revisions.
The silver lining is that the tech sector’s earnings growth is currently expected to turn positive in the last quarter of the year.