Hopes are Building for Tech Earnings to Stabilize

According to Bloomberg data, analysts expect that earnings for technology companies next year will fall -0.2%, compared with a prediction in late June for an increase of +10.5%. The overall S&P 500 ($SPX) (SPY) is still expected to report earnings growth of 5.2% in 2023, although that would be well below the 9.2% predicted as of July 1, according to Refinitive. 

The worsening earnings outlook is one of the main reasons for this year’s -34% plunge in the Nasdaq 100 Stock Index ($IUXX) (QQQ).  However, some analysts believe that the worst of the negative revisions are over for the near term.  Bloomberg Intelligence says, “we’re through the Fed meeting, the midterm elections, and the bulk of the earnings season, so there’s no obvious catalyst for why earnings estimates should move too much lower in the near term.” 

Q3 earnings season has been mixed for technology companies, especially the mega-cap companies that dominate the major indexes.  Alphabet (GOOGL), Amazon.com (AMZN), Meta Platforms (META), and Microsoft (MSFT) all fell following their earnings results. Microsoft’s earnings estimates have fallen -5.9% over the past quarter, while they are down -7.8% for Alphabet, -14% for Amazon.com, and -29% for Meta Platforms.

Earnings results for Apple (AAPL), though, were an exception.  It was a bright spot among mega-cap earnings.  Despite concerns about its iPhone business, Apple has also been an exception in terms of earnings estimates, which have only fallen -2.7% over the past three months.  However, if Apple follows the rest of the tech companies in seeing negative revisions, that could have implications for valuations since it is the biggest U.S. company and trades at a premium to the market.  Also, the Nasdaq 100 trades at 19.4 estimates earnings, slightly below its 10-year average of 20.4.  If Apple’s earnings estimates are cut, the lower earnings expectation for Apple will boost the valuation of the Nasdaq 100 index since Apple is the largest single component in the Nasdaq 100. 

There are concerns that if inflation remains elevated and higher interest rates trigger another leg down in global economic growth, analysts will need to cut technology earnings estimates further in 2023.  Winslow Capital Management said, “valuations are starting to look more attractive, but I don’t think estimates have bottomed.  It could be a multi-month process until we get more visibility about 2023, and it may not be until the middle of next year that we start to see more relative outperformance.”   

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