As earnings season gets underway, the tech sector is facing some significant challenges. Over the past week, the S&P 500’s technology sector has experienced a nearly 6% decline, resulting in a loss of around $900 billion in market value. This comes as expectations of interest rate cuts and the upcoming presidential election have caused investors to move their money from this year’s winners to sectors that have underperformed in 2024.
Expectations for Second-Quarter Earnings
The upcoming second-quarter earnings reports from tech giants such as Tesla, Google-parent Alphabet, Microsoft, and Apple will be closely watched. These companies, known as the “Magnificent Seven,” have been instrumental in driving market gains since early 2023. Strong results from these companies could help boost the performance of the overall tech sector and alleviate some concerns about stretched valuations.
The performance of these tech giants plays a significant role in the broader market. Companies like Alphabet, Tesla, Amazon, Microsoft, Meta Platforms, Apple, and Nvidia have contributed around 60% of the S&P 500’s gains this year. Any signs of weakening profits or unmet expectations could have far-reaching implications for the market as a whole.
Analyst Projections
Analysts are optimistic about the upcoming earnings reports from the tech sector. They expect year-over-year earnings for the tech sector to increase by 17%, while the communication services sector, which includes Alphabet and Meta, is projected to see a 22% rise in earnings. These figures outpace the estimated 11% rise for the S&P 500 overall.
Recent market movements, including the rotation out of tech stocks and into other sectors, have raised concerns among investors. The failed assassination attempt on Trump and the potential tightening of export restrictions on semiconductor technology have added to the uncertainty. Nonetheless, some investors see these pullbacks as buying opportunities for the long term.
Historical data suggests that when the ratio of gaining to declining stocks reaches a certain threshold, the S&P 500 tends to rally in the following months. The recent rotation in the market has been accompanied by an increase in the number of gaining stocks compared to declining ones. This trend has historically been associated with a 4.5% average rally in the S&P 500 over the next three months.
The tech sector’s performance during this earnings season will be crucial in determining the direction of the broader market. Investors will be closely monitoring the results from tech giants to gauge the strength of the current rally in stocks. Despite the recent challenges and uncertainties, there is room for optimism based on historical trends and analyst projections.