Investors expect tech earnings to be the next market challenge.


Tech stocks are off to a strong start after enduring a dismal 2022. The first big test of support of the new year is on tap.

Even after their great sales, the five largest American companies – Apple Inc.,

Microsoft Corporation

alphabet Inc.,

Amazon.com Inc.

and Berkshire Hathaway Inc.

-The S&P 500 ratio is 18.9%. This is well above the historical average of 15%, according to the S&P Dow Jones Indices.

The companies’ heavy weighting in the index makes their next round of quarterly earnings particularly important, as any disappointment leaves the broader market vulnerable to a selloff. Microsoft reported sales of $52.7 billion and net income of $16.4 billion on Tuesday afternoon, followed by other companies in February.

“Even if they don’t care about these earnings, they care,” said Daniel Morgan, senior portfolio manager at Synovs Trust.

Expectations are not high for the team. Microsoft’s sales rose 2 percent, while profits fell 12 percent from a year earlier. Analysts expect revenue growth at the other three big tech companies to average just 2% this quarter, including a 1% decline at Apple. According to FactSet, profits are projected to decline by an average of 39 percent across all three companies..

The pandemic has spurred sales growth in everything from iPhones to cloud computing contracts, which has boosted stock prices. Silicon Valley giants are scrambling to hire enough workers to meet rising demand.

But last year, the script was flipped when the Federal Reserve began its campaign to tighten monetary policy. The Pandemic: As the pandemic progresses, fears of a financial meltdown grow. Now, the prospect of stricter regulations also looms on the horizon.

“In this type of environment, companies are looking to limit costs, so some IT costs can be reinvested,” said Michael Walker, portfolio manager at AllianceBernstein..

His fund owns shares of Microsoft and Amazon.

Tech companies are cutting staff dramatically after headcounts swelled during the pandemic. Alphabet announced last week that it plans to cut 12,000 jobs, the largest layoff ever. Microsoft said last week it was cutting 10,000 jobs, the biggest round in eight years. Amazon.com and Facebook parent meta platforms Inc.

They are also cutting thousands of jobs. Executives are sounding more alarming.

Microsoft CEO Satya Nadella said: “Today we are passing a point where there is a normalization of demand.” “We in the technology industry need to be more productive – not everyone is doing more with less, we need to be doing more with less. We need to demonstrate our own productivity gains.”

Early returns this year are encouraging. Alphabet’s stock gained 11%, while Amazon and Meta gained 15% and 19%, respectively. Apple rose 9.7%, and Microsoft shares are up about 1%. Still, those stocks are below record highs, despite a recent rally.

The sector has benefited from hopes that the Fed will soon reverse its tightening campaign. The 10-year Treasury yield recently closed at its lowest level since September. Tech stocks have historically performed well when bond yields are low.

In addition, the dollar has weakened meaningfully after the strength of the dollar led to large overseas operations last year. The WSJ dollar index closed Tuesday at 95.09, down about 10% from last year’s peak in September.

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The heavy weighting of tech stocks creates a new risk for index funds in a weak job environment, said Ryan Grabinski, investment strategist at Strategas Research Partners. “Those top stocks have been carrying the weight of their earnings for years,” he said, referring to their dividend yield commensurate with their market value.

In the year By the end of 2022, the tech sector will account for 26 percent of the S&P 500’s market value, but it will contribute 21 percent of earnings over the most recent 12 months, he added.

“The risk right now is that some of these business lines are not going to get the revenue they’ve earned,” Mr. Grabinski said.

The tech earnings season is off to a positive start. Netflix Inc.

Stocks rallied last week after Wall Street reported higher-than-expected results. The company has exceeded its own subscriber growth forecasts and said it will regulate password sharing and launch an ad-supported plan.

Also, tech stocks look more attractive after a bearish selloff. For example, Microsoft and Apple trade at less than 26 times and less than 23 times earnings, respectively. Both stocks trade at more than 40 times earnings in 2021, according to FactSet.

Bulls still see the trade slowdown as a short-term problem for another attractive investment.

“I don’t see a total wipeout of the group like in 2000,” Mr Morgan said. We may be headed for a mild recession, but most of these technologies are here to stay and are proven.

Write to Charlie Grant at charles.grant@wsj.com

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