Some analysts are beginning to lower earnings estimates on some of the world’s mega-cap technology stocks, which undermines the argument that valuations look cheap after this year’s market rout. Alphabet (GOOGL), Amazon.com (AMZN), and Nvidia (NVDA) are among those stocks that have seen their earnings estimates reduced over the past month amid growing speculation that aggressive Fed rate hikes may cause a recession.
JPMorgan Chase today lowered earnings estimates on 26 internet stocks, especially those exposed to online advertising, citing macroeconomic pressures, forex, and company-specific dynamics. JPMorgan cut earnings estimates and price targets on Snap (SNAP), Meta Platforms (META), Pinterest (PINS), and Spotify Technology (SPOT) amid caution on the impact that an economic slowdown will have on ad spending.
According to Bloomberg Intelligence data, earnings estimates for most of the companies in the S&P 500 Index ($SPX) (SPY) have remained steady or even risen, with profits projected to expand more than 10% this year, up from a forecast of 8.7% at the start of the year. However, the aggregate forecast for 2022 earnings per share for the tech-heavy Nasdaq 100 Index ($IUXX) (QQQ) peaked in February and has since fallen almost 3%.
After sinking -29% this year, the Nasdaq 100 is priced at about 19 times projected profits, close to the lowest since the start of the pandemic and down from a peak of 31 after the Fed boosted stimulus in 2020. If profits start to shrink, that will erode the argument that many tech stocks are cheap. Moreover, falling earnings estimates raise the prospect of more selling pressure as the denominator in the price-to-earnings ratio sinks, making the stocks look more expensive.
Janney Montgomery Scott said, “given what we know of slower economic conditions, the dollar’s strength and the impact that has on multinational profits, and margins coming under pressure, we think consensus estimates seem rather ambitious.” However, Citigroup says that the bearish expectations could set stocks up for a strong second half of the year if earnings aren’t as bad as feared. Citigroup expects profits to hold up and projects the S&P 500 to rally about 10% by year-end.
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