Tech stocks is facing a reckoning ahead of tough earnings season

BLOOMBERG

This year’s 20% rally in US technology stocks is decoupling from reality ahead of what’s predicted to be a gloomy reporting season, the latest MLIV Pulse survey shows.
While investors have flocked to tech in the market shakeup amid recent banking turmoil, the rotation is at odds with analyst calls for the steepest drop in quarterly profits for the sector since at least 2006. Nearly 60% of the 367 respondents surveyed by Bloomberg said the bounce in the shares had nothing to do with earnings expectations.
Profits at big banks, on the other hand, are likely to have taken a hit from the tumult in the industry, according to 41% of the participants.
“The tech outperformance is a bit overdone and we’re not chasing that indiscriminately,” Wei Li, global chief investment strategist at BlackRock Inc, said in an interview. “It’s being driven by expectations the Federal Reserve will start cutting rates as a recession becomes evident, and not necessarily by company fundamentals.”
The fallout from Silicon Valley Bank’s collapse has spurred mixed narratives as to where policy and markets are headed. While worries of a recession are mounting, they’re also stoking optimism that the Fed will be forced to pause its rate-hike campaign, even as the central bank grapples with sticky inflation.
The reporting season is the next big catalyst for investors who’ve been glued to economic data and Fedspeak for market cues. The earnings will drag the S&P 500 lower, said 60% of survey respondents, while data compiled by Bloomberg Intelligence shows analysts estimate a profit drop of 8% for its members in the first quarter.
“More broadly, the impact of inflation and higher costs still has room to hit profit margins, and that will come through this season,” said BlackRock’s Li.
The report card for tech will be crucial for the overall market, since the S&P 500’s 7% gain in the first quarter has been mostly powered by a handful of the sector giants. Analysts estimate US tech earnings plunged 15% in the three months through March, with companies hit by high costs and slowing demand.
Early omens don’t bode well, with broad layoffs in the industry signalling a slowdown. Tesla Inc shares, which trade more like a growth or tech stock, slid this month after the electric-car maker’s slim gains in vehicle deliveries in the last quarter disappointed investors.
About a fifth of S&P 500 firms have issued guidance on first-quarter results, with three negative forecasts for every positive one, according to Aneeka Gupta, a director at Wisdomtree UK Ltd.