By Louis Krauskopf
NEW YORK (Reuters) – With earnings season in full swing, bullish investors are hoping strong corporate earnings will help stem the tech sell-off that has dampened U.S. stocks’ rally this year.
The S&P 500 technology sector has fallen nearly 6% in just over a week, shedding about $900 billion in market capitalization, as rising hopes of lower interest rates and President Donald Trump’s reelection have drawn money away from this year’s winners and into sectors that are set to underperform in 2024.
Stocks fared slightly better, dropping 1.6% in just over a week. Tech declines were partially offset by strong gains in financials, industrials and small caps. The index is up more than 16% so far this year.
Second-quarter earnings could bring tech companies back into the spotlight. Tesla (NASDAQ:) and Google-parent Alphabet (NASDAQ:) are both due to report on Tuesday, kicking off a wave of earnings reports from the “Magnificent Seven” group of mega-cap stocks that have been driving the market since the start of 2023. Microsoft (NASDAQ:) and Apple (NASDAQ:) are due to report next week.
“Big tech stocks are leading the way, and for good reason,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute. “They’re generating profits, they’re growing revenues and they’re dominating niche markets.”
Strong performance from market-leading companies could ease some of the concerns that have plagued mega-caps recently, including worries about overvaluation and a surging stock market that’s been highlighted by the incredible rally in stocks such as Nvidia (NASDAQ:), which is up 145% this year despite recent pullbacks.
Meanwhile, signs of weaker-than-expected profits and artificial intelligence spending could test the tech-dominance view that has buoyed stocks this year. That could soon become a problem for the broader market. Alphabet, Tesla, Amazon.com Inc. (NASDAQ:), Microsoft Corp., Meta Platforms Inc. (NASDAQ:), Apple Inc. and Nvidia Corp. have accounted for about 60% of the S&P 500’s gains this year.
Earnings from market leaders are expected to reach high levels. The technology sector is expected to grow profits 17% from a year ago, while the communications-services sector, which includes Alphabet and Facebook-parent Meta, is expected to see earnings rise about 22%. That would outpace the 11% expected gain for the S&P 500 as a whole, according to LSEG IBES.
Anthony Sagrimbene, chief market strategist at Ameriprise Financial (NYSE:), believes many investors were caught off guard when the inflation report released earlier this month solidified expectations of a Fed rate cut in September, sparking inflows into sectors of the market that have struggled with tight monetary policy.
The exodus from the tech industry accelerated this week as the weekend assassination attempt on President Trump is seen as strengthening his position in the presidential election.
Additionally, semiconductor stocks were hit hard by reports earlier this week that the U.S. was considering tightening export controls on advanced semiconductor technology to China, with the Philadelphia SE Semiconductor Index down about 8% since last week.
“Our advice to investors is to use some of the sell-off in these sectors as an opportunity to allocate assets over the long term,” Sagrimbene said, adding that he believes upcoming earnings reports could ease selling pressure on big tech companies.
Indeed, some investors are encouraged about the sustainability of this year’s stock gains as the rally spreads to other parts of the market.
The recent rotation saw the number of advancers and decliners over a five-day period reach its highest level since November, according to Ned Davis Research. When advancers outnumber decliners by more than 2.5 to 1 over the past five days, the S&P 500 has risen an average of 4.5% over the following three months, according to NDR. “The risk is that large caps drag down the average price of popular stocks, but historically, a strong improvement in breadth has been bullish for stocks going forward,” Ned Davis strategists said in a report on Wednesday.
