Strong Q3 Earnings May Not be Enough to Boost Tech Stocks

Market participants hope the upcoming Q3 earnings reporting season may be strong enough to reverse this year’s selloff in technology stocks.  However, even stronger-than-expected earnings may not be enough to spark a rally if companies’ cut their outlooks for future growth.  Headwinds, including higher interest rates, a strong dollar, and slower economic growth, will likely result in cautious commentary from company executives.

While Q3 earnings may beat already-lowered estimates, that may be no consolation if analysts have to cut 2022 and 2023 estimates again.  It’s primarily a problem for technology stocks because earnings for the sector are now forecast to decline in Q3, unlike the rest of the market.  It will also undermine the argument that the current selloff in technology stocks has created some bargains.

According to Bloomberg Intelligence, earnings for the tech sector are expected to fall -6.5% in Q3. Back in June, the consensus had been for growth in earnings of about 3%.  For the overall S&P 500 ($SPX) (SPY), the consensus for Q3 earnings has dropped from 10.3% growth in late June to a 2.9% increase now.  Bensignor Investment Strategies said, “consensus estimates need to come down more, and while the earnings season may be better than expected, outlooks will hurt.  If we get a major negative outlook, recent stock gains will disappear in a flash.”

Stocks as a whole have taken a hit this year from uncertainties to future growth. Companies like FedEx (FDX) warned that their gross margins might miss estimates due to rising freight costs, while Nike (NKE) warned that a surge in inventories resulted in markdowns that undercut its gross margins.  In the tech sector, Micron Technology (MU) recently gave a weak sales forecast, as did fellow chipmaker Nvidia (NVDA).  The Nasdaq 100 ($IUXX) (QQQ) trades at 20 times estimated earnings, near its 10-year average.  However, falling estimates would lower the denominator in the price-to-earnings ratio, making tech stocks look more expensive.

Bank of America Global Research said technology and growth stocks “may not be as defensive as some investors expect,” as earnings for Nasdaq 100 companies continue to weaken compared with those stocks in the S&P 500.  Morgan Stanley said the likelihood of more cuts in earnings estimates ahead suggests that valuations don’t reflect the reality of the economic environment and that recent optimism about the Fed relaxing its hawkish stance was premature.

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