Big technology stocks may surprise to the upside when they report results in coming days. But even a better-than-expected quarter and companies’ improved earnings and revenue forecasts may not be enough to save the market from its recent reversal, according to some professional investors. “They really need to show up and prove themselves,” said Adam Sarhan, CEO of 50 Park Investments, noting that all the ingredients look ripe for a pullback. “The market needs some kind of rescue; it needs some kind of bullish catalyst … because there’s a tremendous amount of weakness.” Monday kicked off one of the busiest earnings weeks of the third quarter season in what’s slated to be a critical week for Big Tech, with results from four major players on deck. Tesla and Netflix unofficially launched the earnings period for the sector last week. That continues Tuesday with results from Alphabet and Microsoft , followed by Meta Platforms on Wednesday and Amazon Thursday, all after the market closes. MSFT YTD mountain Microsoft shares year to date The reports from the technology titans come at a tricky time for the broader stock market, and investor sentiment. For the better part of 2023, tech stocks rallied as investors shifted back toward companies growing the fastest, bet on the excitement around artificial intelligence and bond yields promised to pull back. The stocks that are often referred to as the “Magnificent Seven” dominated most of the market’s gains earlier in the year and propelled the broad indexes higher. That narrative shifted in recent weeks as bond yields reversed course and the Federal Reserve fanned fears of a higher-for-longer interest rate environment — even opening the door to another hike before year end. After a rocky September, third quarter earnings mark the next key test for these companies that make up more than a quarter of the S & P 500, setting the tone for the entire season and where the market finishes the year. The earnings setup Heading into the earnings, many companies face easier comparisons over last year. In fact, for the information technology and consumer discretionary sectors as a whole, the blended earnings growth rate is expected to improve 4.7% and 23.1% year-over-year, respectively, according to FactSet. “It’s the best spot to be in when expectations are as low as they are,” said Ken Mahoney, president of Mahoney Asset Management. “When expectations are high, and the market is rallying, look out.” GOOGL 1M mountain Alphabet shares over the last month A low bar compared to last year may bode well, but how the stocks trade after hours is ikely to depend on what they say about the immediate future of their business. These forward-looking forecasts play critical roles in deciding investor sentiment. In fact, Microsoft sold off last quarter after what Wall Street interpreted as a delayed AI ramp and slower revenue growth. Heading into its results, Deepwater Asset Management’s Gene Munster views Instagram-parent Meta Platforms as one of the companies poised to show the greatest strength. That’s due in part to easy comparisons, a favorable advertising environment and expectations for double-digit revenue growth, he said. Of the largest tech stocks, Meta Platforms is expected to show rapid revenue growth acceleration, at 21%. META YTD mountain Meta Platforms shares since the start of 2023 In fact, Bernstein’s Mark Shmulik called Meta Platforms one of the best risk-reward opportunities in the internet sector in a Monday note, saying he expects growth is accelerating in the second half off 2023. 2023’s AI poster child Nvidia also looks well-situated for “rocket ship upside” given the excitement around AI and easy year-over-year comparisons, Munster said. Weathering the volatility To be sure, even a beat and a raise may not be enough to propel these technology stocks further in the midst of a suddenly difficult period marred by rising bond yields, geopolitical risks in the Middle East and Europe and signs of potentially higher-for-longer rates . How the largest stocks perform against the latest macroeconomic headwinds will influence the entire market’s momentum, Sarhan said. “We’re in a situation where the bar is lower, but the environment has been reduced so much as well,” he said. “If they can prove that they were able to earn and make money in that kind of environment that would be very, very bullish.” Should the companies surprise to the upside, some investors expect a relief rally, but that momentum may not necessarily extend into year end, especially as bond yields push higher and the market waits to see if the Federal Reserve pushes its benchmark rate higher still. “That optimism is probably going to be short lived because we still have this macro piece related to what’s happening with rates, and my sense is that the Fed isn’t kidding when they say they’re going to be higher for longer,” said Munster. “I don’t think we’re in a period right now where we’re at a sustainable rally for tech.”
