Tech stocks face key tests in coming months as earnings pour in

Fawad Razaqzada 27/04/2021
Tech stocks face key tests in coming months as earnings pour in  Tech stocks face key tests in coming months as earnings pour in
Tech stocks face key tests in coming months as earnings pour in
The so-called FAAMG group of US technology stocks (Facebook, Apple, Amazon, Microsoft, and Google), which represent a quarter of the S&P 500’s market capitalization, will be reporting their results in the next few days. The quarterly numbers and outlooks of these and other big tech companies could potentially have significant implications on the S&P 500 and obviously the tech-heavy Nasdaq indices.
 
The tech sector was among the biggest beneficiaries of the lockdown but as Netflix and Intel reminded us last week, past performance is not necessarily a good indicator for the future. Tesla also reported a record profit and made $101 million on Bitcoin holdings, but its shares fell 4% today. The lack of further bullish follow-thru for Tesla shares may be sign of things to come for the tech sector.
 
It is possible that the bar may be set too high for these companies to beat. In addition, investors are looking ahead and would be wondering what will drive their shares as economies end lockdowns:
 
  • Working from home may soon become a thing of the past for many employees and other pandemic-driven consumer preferences are going to evolve. This might have major implications, especially for the technology sector. For example, companies with subscription-based services might struggle to win new customers the same way they did during lockdown when people stayed at home mostly and purchased services online. Taking Netflix as an example, its subscriber growth slowed far faster than anticipated in Q1 and was the smallest first quarter gain in four years. Its shares slumped, even though it reported better-than-expected top and bottom lines. So, it is going to become increasingly difficult for these types of companies that excelled last year to keep up pace. Investors will be focusing on what company execs will be highlighting about the changing behaviour of consumers in their quarterly reports and earnings calls, than just merely concentrating on the top and bottom lines.
 
  • Another big risk facing US companies is tougher regulations and higher taxes for the richest Americans. President Joe Biden and the Democratically-controlled Congress will be keen to regulate tech giants, with regulators continuing to pursue anti-trust actions against the likes of Apple and Alphabet. Meanwhile Biden’s proposal of nearly doubling levies on capital gains for people earning more than $1m could provide a massive blow to the equity markets, if it ultimately passes in a form similar to the initial proposal. It could discourage the richest Americans who are likely to own shares from allocating money towards long-term investments. They might sell shares before the tax increase becomes low, potentially derailing the stock market rally.
 
  • Meanwhile, as global lockdown measures are slowly likely to ease, things will hopefully return to more normal ways in the coming months. The US economy is likely to rebound strongly, and inflation will probably heat up as a result, requiring tighter monetary policy as a result. If the Fed were to start tapering bond purchases later in the year, this will likely put upward pressure on bond yields. Rising yields are seen as negative for the growth stocks, whose dividend yields are comparatively lower than what you would get from fixed income.
 
 
So, the technology sector may not perform as spectacularly as it did last year and there is a risk even, we could see a reversal in shares of tech giants as investors worry about rising borrowing costs, tougher regulations, higher taxes and lower earnings potential in the coming quarters.
 
Still, any blowout numbers could provide short-term boost to their shares, or at least help keep them at lofty levels for a while yet. So, keep an eye on Microsoft, Google and AMD which are among the companies publishing their results after the closing bell tonight, while Apple, Facebook, eBay and Qualcomm are set to post their numbers on Wednesday, with Amazon to follow a day later on Thursday.
 
Microsoft is expected to see solid demand thanks to the IT spending recovery and analysts are expecting its revenue to rise at its fastest pace in the past 10 quarters to $41.1 billion from $35.0 billion in the previous quarter. Microsoft is expected to deliver an adjusted earnings per share of $1.78 vs. $1.40 previously. Google parent company Alphabet is also expected to provide strong set of results, as it is likely to have benefitted from the strength in digital ad spending as well as cloud sales. GOOG’s adjusted EPS is expected to be $19.72 on revenue of $51.60 billion.

S&P 500Source: ThinkMarkets and TradingView.com

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