Stretched valuations, coupled with the threat of rising interest rates, have landed technology stocks into trouble to start the new year.
And although Microsoft (MSFT) on Tuesday bucked a trend of lackluster fourth quarter results, DataTrek Research thinks a couple of factors are sending the popular sector into a downward spiral, which aren't likely to be offset by encouraging earnings. That could spell bad news for Meta (FB), Google (GOOG), Tesla (TSLA) and Apple (AAPL): the last two report earnings this week.
“The upshot here is that the Street’s earnings estimates for Apple, Microsoft, Google, and Tesla are all the same or higher as a month ago while Amazon (AMZN) and Facebook’s estimates are only very modestly lower,” the firm told clients on Tuesday.
The value of technology stocks is their future earnings profile. As a grim sell-off drives down lofty valuations and discount future earnings ahead of Federal Reserve rate hikes, the present value of those stocks falls further — and faster — than the broader market, DataTrek noted.
For example, Apple, which reached a major milestone earlier this year by hitting a market cap of $3 trillion, is set to release its fiscal 2022 first-quarter results after the bell on Thursday. Investors are hoping for a solid performance from the company, but shares have been going downhill even as there's been no material change to the iPhone maker's business outlook.
But Wall Street analysts are taking a more sanguine view of the future. Earnings estimates have "no change to calendar Q4 or 2022 estimates" for the company, and they are only "1 cent higher for 2023," DataTrek noted.
Still, the fear of rising interest rates has triggered a plunge in technology stocks, as several companies now look undervalued causing investors “looking elsewhere for opportunities,” the firm wrote.
Indeed, the mega-cap tech stocks aren’t cheap. Apple trades at a multiple 28 times earnings, while Microsoft (MSFT) trades for at 32x earnings, and Amazon (AMZN) trading for 75x earnings, according to DataTrek estimates. Google, Tesla and Meta/FB have equally lofty valuations.
For those reasons, investors “want to see something more than static or marginally higher earnings estimates," DataTrek said.
Meanwhile, all three major indexes fell anew on Tuesday, continuing a losing streak that began at the start of 2022. The bulk of the sell-off has been a combination of markets contending to new dynamics like slowing growth, a tightening Fed, and fallout from the pandemic.
Yet, while the downward momentum in stocks has been fueled by escalating worries around interest rate hikes and tightening monetary policy, investors are concerned about “the surprise factor for future earnings is smaller than before.”
Even after this sell-off, big tech companies will likely struggle with high valuations when earnings estimates aren’t increasing much, and interest rates are rising.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv