This year’s rally in technology stocks will be tested later today when Alphabet (GOOGL), Apple (AAPL), and Amazon.com (AMZN) all report quarterly earnings results. These three mega-cap technology stocks have a combined market value of $4.7 trillion, accounting for more than 12% of the S&P 500 Stock Index ($SPX) (SPY) and more than 25% of the Nasdaq 100 Stock Index ($IUXX) (QQQ). The overall market will follow if these three stocks move in the same direction.
Market sentiment has turned supportive of the economic outlook with expectations for the Federal Reserve to end its rate hike campaign this year as inflation cools, especially after Fed Chair Powell on Wednesday said the Fed had made progress in slowing the pace of price increases. However, earnings results this season have been less than stellar, with a number of high-profile disappointments, including Intel (INTC), Snap (SNAP), and Texas Instruments (TXN). Nevertheless, despite the weak earnings reports, stock indexes have been rallying as investors speculate the economic backdrop will improve later in the year.
Apple is up 12% this year, despite concerns about the company’s iPhone business, given production delays and questions about consumer demand. Analysts predict Apple’s revenue fell -2.3% last quarter, which would be the company’s first quarterly sales drop in three years. Apple trades at 23 times estimated earnings, above its 10-year average multiple of 17.2.
Alphabet is up 14% this year after falling 39% in 2022. It trades at 17.3 times estimated earnings, below its 10-year average, and trades at a discount to the Nasdaq 100. Revenue for Alphabet is projected to climb 2% in the past quarter. Analysts are generally bullish on the company, with 92% of analysts tracked by Bloomberg having a buy recommendation on the stock, with the average 12-month price target projecting an upside of 23%.
Amazon.com is up 23% this year after the stock lost half of its value last year. Analysts predict Amazon will report revenue growth of 6.1% last quarter, which would be the slowest pace since 2001. Last week, Microsoft warned of a slowdown in cloud sales, suggesting a weakness in demand that could also affect Amazon Web Service. The average analyst price target indicates an upside of 30% for Amazon.
So far this year, the Nasdaq 100 is up more than 13%, a pace that will most certainly cool down since it would result in a 289% annual gain if the rally continued for the rest of the year. In 2022, Apple, Alphabet, and Amazon.com lost a combined $2.46 trillion in market value. Truist Advisory Services said, “while stocks have been acting well so far this year, earnings haven’t been great, and it is tough to see how these tech earnings can be extremely strong given the backdrop.” In addition, Truist is skeptical the market can hold on to its gains given it’s trading at above-average valuations.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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