Big Tech’s Growth Status in Doubt With Weaker Sales Outlooks

(Bloomberg) -- Earnings for most of Big Tech are out and the group delivered even bigger profits than Wall Street anticipated. The bad news: the outlook for repeat performances in the fourth quarter dimmed. 

Apple Inc., Alphabet Inc., Meta Platforms Inc. and Tesla Inc. all gave investors reason to fret about growth. From Apple’s muted holiday outlook to Google parent Alphabet’s lackluster cloud computing sales results, a recurring theme for the cohort was caution. Meta warned that the year ahead is looking less predictable, while Tesla raised concerns that demand for electric cars is starting to weaken.

That’s stirring angst for investors even as the Nasdaq 100 Stock Index rallied last week, rising 6.5% and clocking in its best week in a year.

“This is all about failure of future guidance,” said Scott Colyer, chief executive at Advisors Asset Management. “Big tech stocks were priced to historic perfection, so that left investors disappointed after those companies came up short.”

Tech stocks are now on shaky ground. The seven biggest tech stocks are down an average of about 9% from 52-week highs. Apple alone has lost more than $300 billion in market value.

The selloff has made valuations cheaper, but they’re still pricey and with future expansion less certain, investors are balking at paying up for the stocks. Shares of the seven biggest companies in the S&P 500 Index are priced at an average of 31 times projected profits, according to data compiled by Bloomberg. That’s nearly twice the multiple of the other 493 stocks in the benchmark.

Profits for the seven biggest so-called growth companies in the S&P 500 — Apple, Microsoft Corp., Alphabet, Amazon.com Inc., Nvidia Corp., Meta and Tesla — are on course to rise 50%, according to data compiled by Bloomberg Intelligence. Despite Tesla missing earnings, the group is poised to surpass the 36% increase estimates called for before earnings season began. Nvidia is the last to report on Nov. 21.

To Keith Lerner, co-chief investment officer at Truist Advisory Services, the pressure on Big Tech is a sign that the correction in the S&P 500 is close to running its course, setting the stage for outperformance in the last two months of the year, which tend to be a good time for stocks.

“We are in a better seasonal period for the market, rates stabilizing, mixed economic data and upbeat news on AI,” he said. “With many investors underperforming, partly because of missing out on tech earlier this year, we think we could see some investors chasing tech into year-end on the fear of being left behind.”

Of course, the tech sector in the S&P 500 still carries a nearly 36% premium to the index on a forward price-to-earnings basis, per data compiled by Bloomberg Intelligence.

That’s why Colyer says he still sees more pain ahead for bigger growth stocks that may have gotten ahead of themselves. His firm, Advisors Asset Management, has opted to own Microsoft shares on bets that the company’s big artificial intelligence investment is paying off.

“There’s a lot of AI hype, but not every company is market ready,” he added. “Stocks may rally into the end of the year, but I wouldn’t say this is an all-clear for tech shares or even the broader market.”

After the S&P 500 logged three straight monthly declines, the gauge notched its best week of 2023 after the Federal Reserve signaled on Wednesday that a run-up in long-term Treasury yields will reduce the impetus to raise interest rates again.

Still, the battle between tech stocks and bond yields may continue in the weeks ahead, which may potentially hurt money managers who’ve just plunged back into US megacap companies as yields fell.

“Everything can change in a heartbeat if there is economic or geopolitical upheaval, which would directly impact stocks broadly that aren’t discounting the inherent dangers of a concentrated market in technology companies,” said Max Wasserman, senior portfolio manager at Miramar Capital. “So be cautious and don’t get too optimistic on megacap tech.”

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