Tech stocks down despite upbeat earnings
Better earnings equals higher share prices, or so goes the customary thinking. For technology stocks during this reporting season, it is the exact opposite.
Companies from Alphabet to Microsoft announced quarterly results that beat analyst estimates by a combined 7.7 per cent, more than any other industry group in the S&P 500 Index. Yet their stocks posted the worst first-day reaction, falling an average 1.8 per cent.
As tech megacaps from Facebook to Amazon and Google parent Alphabet reported earnings, the Nasdaq 100 Index ended a three-week streak of gains. The gauge finished the five-day period with a 0.2 per cent loss and dropped 0.7 per cent from a record high on Wednesday.
“Look at some of the businesses, whether it’s Apple or Google, their revenue and profit growth is staggering,” said Marshall Front, who manages US$800 million at Front Barnett Associates in Chicago as chairman. “But over-concentration can lead to too much volatility on the downside.”
The S&P 500 slipped less than 0.1 per cent over the five days. The Dow Jones Industrial Average gained 1.2 per cent as robust results from Boeing, Verizon Communications and Caterpillar were rewarded with weekly share gains exceeding 7 per cent.
The disconnect highlights the challenge for high flyers such as Apple and Nvidia still due to announce results and poses a risk for a sector that has been whipsawed by price swings since June. Good profits are n0t proving to be enough for investors who have already held a record-high percentage of tech stocks in their portfolios.
Bank of America strategist Savita Subramanian flagged the potential for lacklustre returns this month, warning that the bar had been set higher for tech companies after investors crowded into stocks with the highest growth potential.
“Positioning risk may be an overhang to performance despite solid fundamentals,” she wrote in a research note.
In June, after investors had flocked to tech stocks anticipating faster earnings growth in a move that pushed the Nasdaq 100 Index to rise twice as fast as the S&P 500, they rushed for the exit all at once, sparking the worst sell-off since 2008 relative to the rest of the market.
The vulnerability was on display again on Thursday as tech stocks bore the brunt of a sell-off triggered by a note from JP Morgan that cautioned investors about the risks of record-low volatility.
In another sign that people are on edge, about US$2.5 billion was pulled out of the largest exchange-traded fund tracking the Nasdaq 100 over the week, the most since 2007.
While tech stocks as a whole are trading at valuations similar to the broader market, anxiety is growing over prices for the industry’s leaders. The five biggest American companies by market capitalisation, all involving internet or software, have rallied an average of 32 per cent since December, accounting for almost one-third of the S&P 500’s advance in 2017.