Anyone distracted by the stock-fueled circus powered by Reddit this month may have missed an important milestone: a stellar earnings season for tech companies that helped the group’s shares outperform the market once again.
With more than half of S&P 500 earnings reports in books, tech companies like Skyworks Solutions Inc. i Paypal Holdings Inc. leads all other major benchmark sectors by more than 95% exceeding earnings estimates, according to data collected by Bloomberg. In terms of revenue, 88% has exceeded estimates.
The strong display has helped revive gains in technology stocks after months in which the group lagged behind cyclical sectors such as industrials that tend to benefit more in a booming economy. Since the earnings season began on January 15, the S&P 500 Information Technology Index gained 6.2%, just behind the communications services group that includes tech giants like Alphabet Inc. and Facebook Inc.
“They had big gains that you just can’t ignore,” Gary Bradshaw, portfolio manager at Hodges Capital Management, said about technology companies. “This profit season shows they will continue to grow at a solid pace.”
By 2021, technology stocks were already up expected by many with lower performance than other industries willing to faster profit growth. One of the key pillars of its strength last year – digital services and hardware that have been in such high demand during the Covid-19 pandemic – would fall by the wayside as vaccines slowly returned to normal. to the economy, or so he was thinking.
So far, strong demand has shown few signs of decline. Wall Street has noticed performance and raised earnings estimates after keeping them flat for months. Analysts now project 11% profit growth in the fourth quarter, up four times from two weeks ago. Earnings estimates for the first three months of 2021 have risen 40% since early January, the largest advance among the top 11 industry groups, according to data compiled by Bloomberg Intelligence.
One of the bulls ’concerns is the lethargic reaction of stocks to good earnings reports from the largest tech companies in the United States. Of the five largest stocks on the market, Alphabet Inc. and Microsoft Corp. they are the only companies that have higher shares after their profit reports. Since then, Google-parent has gained 8.8% reported earnings and earnings per share on Feb. 2 that surpassed analysts ’highest estimates, while Microsoft has advanced 4.3% since Jan. 26.
Despite exceeding estimates of almost every metric, Apple has fallen 3.7% since its report. Amazon.com Inc., of whom revenue projections far exceed analysts ’estimates, they have fallen 0.8% since their February 2 results.
High ratings from the sky
According to Jason Benowitz, senior portfolio manager at Roosevelt Investment Group, the enthusiasm of silenced investors is likely to be related to high valuations, in relation to trading in cyclical sectors and to antitrust risks lurking.
“They are formidable companies that are very profitable and can adapt to the environment and deliver them to shareholders,” he said. “The things that hold them back on a relative basis still exist and I’m not convinced they will surpass 2021.”
Some of the the biggest surprises have been from chip makers like Skyworks Solutions and software companies such as ServiceNow Inc. Both shares have gained at least 12% since the results were published.
Among the companies that reported profits next week is a network giant Cisco Systems Inc., a social media company Twitter Inc. and online travel company Expedia Group Inc.
S&P 500 technology stocks traded at 36 times reported earnings, compared to less than 32 for the broader index. Concerns about potential regulation should make it difficult for tech companies to last, given the premium they get with the group trading near the most expensive valuation multiples in nearly two decades, according to Matt Maley, chief market strategist by Miller Tabak + Co.
“With the new administration, there will be a more diligent effort to pass real regulation against some of these megacaps of technology,” Maley said. “It won’t kill them and blow the bubble, but that could create a headwind, and that’s a real concern that a lot of investors have. That’s one of the few things there’s bipartisan support.”