Tech Titans’ Future Uncertain: Sales Struggles Loom Large

Big Tech companies have exceeded Wall Street’s expectations with their earnings, reporting even higher profits. However, the outlook for the fourth quarter suggests that achieving similar results may be more challenging.

Apple Inc., Alphabet Inc., Meta Platforms Inc. and Tesla Inc. gave investors reason to worry about growth. From Apple’s muted holiday outlook to Google parent Alphabet’s lackluster cloud sales results, a recurring theme among the cohort was caution. Meta warned that the coming year looks less predictable, while Tesla expressed concern that demand for electric cars is starting to weaken.

That’s causing anxiety among investors, even as the Nasdaq 100 stock index rallied last week, up 6.5% for its best week of the year.

“This is a failure of forward guidance,” said Scott Colyer, CEO of Advisors Asset Management. “Major tech stocks were priced to historic perfection, so investors were disappointed when companies fell short.”

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

The sale has made valuations cheaper, but they are still expensive, and with uncertainty about future expansion, investors are reluctant to pay for the stock. Shares of the seven largest companies in the S&P 500 index are priced at an average of 31 times forecast earnings, according to data collected by Bloomberg. It is almost twice more than the multiple of the benchmark index’s 493 stocks.

The S&P 500’s seven largest so-called earnings of growth companies — Apple, Microsoft Corporation, Alphabet, Amazon.com Inc., Nvidia Corp., Meta and Tesla — are up 50%, according to data collected. Bloomberg Intelligence. Despite Tesla’s missing earnings, the group is poised to exceed the 36 percent growth forecasts required before the earnings season begins. Nvidia reported last on November 21.

For Keith Lerner, chief investment officer at Truist Advisory Services, the pressure on Big Tech is a sign that the S&P 500’s correction is nearing its end, setting the stage for better returns in the final two months of the year. which is usually a good time for stocks.

“We are having a better season for the market, prices are stabilizing, Economic data is mixed and AI news is good,” he said. “With many investors underperforming, in part because they missed out on tech earlier in the year, we believe some investors will chase tech at the end of the year for fear of being left behind.”

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

That’s why Colyer says he sees more pain ahead for larger growth stocks that may have gotten ahead of themselves. His company, Advisors Asset Management, has decided to own Microsoft stock, citing the company’s big AI investment as paying off.

“There is a lot of AI hype, but not all companies are market ready,” he added. “Stocks may be up at the end of the year, but I wouldn’t say this is a clear cut for tech stocks or even the broader market.”

After posting three monthly declines, the S&P 500 posted its best week in 2023 after the Federal Reserve said on Wednesday that a rise in long-term government yields would reduce the impetus to raise interest rates again.

However, the battle between tech stocks and bond yields could continue in the coming weeks, potentially hurting money managers who have just plunged back into US megacaps as yields fell.

“Everything can change in an instant if there’s an economic or geopolitical upheaval that would directly affect stocks broadly, which doesn’t mitigate the inherent dangers of a concentrated market for tech companies,” said Max Wasserman, senior portfolio manager at Miramar Capital. “So be careful and don’t be too optimistic about megacap technology.”

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