Earnings estimates for technology stocks continue to fall due to the weakening outlook for revenue and profits. According to Bloomberg Intelligence, earnings for stocks in the S&P 500 Information Technology Index are now expected to contract -0.4%, down from estimates calling for growth of about 4% just six weeks ago.
The Nasdaq 100 Stock Index ($IUXX) (QQQ) is up nearly +16% this year, partially due to the idea that profit margins should improve as companies shed workers and cut costs. Mega-cap tech companies such as Microsoft (MSFT) and Salesforce (CRM) have announced layoffs in the tens of thousands. Also, speculation that the Federal Reserve is near the end of its rate-hike regime has boosted technology stocks.
Despite the cost-cutting by many technology companies, analysts continue to slash tech profit estimates for 2023. With quarterly earnings results in for two-thirds of the stocks in the S&P 500, about 79% of technology companies have beaten the lower-bar for profit expectations, an improvement from Q3 when 74% beat expectations. However, revenue is lagging, with only about 50% of technology stocks beating estimates, compared with 59% in Q3. Bloomberg Intelligence data shows revenue for S&P 500 technology companies is projected to expand by only about 2% this year, the slowest growth for the sector since 2016.
Results this earnings season from mega-cap technology companies have generally been disappointing. Data from Bank of America shows that, in total, earnings from Apple (AAPL), Microsoft, Alphabet (GOOGL), Amazon.com (AMZN), and Meta Platforms (META) missed estimates by an average of about 8%. Despite cost-cutting measures, weak demand is hurting company profits. Shopify (SHOP) today dropped more than -15% after giving a weaker-than-expected sales outlook, despite being one of the first technology companies to slash its workforce last year.
With technology stocks climbing and profit estimates falling this year, valuations in the Nasdaq 100 are rising again after falling in 2022. The Nasdaq 100 is priced at 24 times profits projected over the next 12 months, compared with the 10-year average of 20. However, Bokeh Capital Partners warns that if demand doesn’t recover, cost-cutting alone will not be enough to push stocks technology higher. “You can do something about the cost side, but at the end of the day, if your customer doesn’t feel like your product is adding value at this time, then you’re going to have a shortfall.”
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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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