Analysts Remain Optimistic on Technology Sector

Despite recent weakness in the overall equity market, analysts generally remain optimistic about the technology sector.  According to data compiled by Bloomberg Intelligence, analysts have raised their 2022 earnings growth estimates for technology companies in the S&P 500 Index ($SPX) (SPY) by two percentage points since the reporting season started in January, while projections for the broader index have barely moved.

Profit growth estimates for the information technology sector in 2022 have risen to 13% from 11% in January, better than the 9% estimate for the S&P 500 as a whole.  Despite the earnings optimism, however, the Nasdaq 100 ($IUXX) (QQQ) remains down -17% from its peak in November, and the S&P 500 is down -10% so far this year.

The disconnect between a drop in stock prices and rising profit expectations points to the level of anxiety about the effects of anticipated interest rate hikes by the Fed, combined with risks posed by soaring inflation and Russia’s invasion of Ukraine.  Moreover, the expected increase in interest rates has tarnished the appeal of technology stocks as higher rates reduce the present value of future earnings.

Recent earnings results have been strong for technology companies as 87% of technology stocks in the S&P 500 beat profit estimates in Q4.  While that was down from 92% in Q3, it was the strongest of all the other sectors in the S&P 500. 

CIBC Private Wealth Management is optimistic but cautious about technology company earnings going forward.  CIBC says that they “don’t see anything derailing earnings growth over the next 18 months, but there’s still a lot of uncertainty, and valuations remain above average.  It will take time to be sure that, going into mid-2022, consumer spending won’t retrench and that there is a reason to be confident about tech earnings.”