A tumultuous first half wiped out $5.6 trillion in market value from the Nasdaq 100 Index through the end of June, with rate hikes hitting stocks valued on future earnings, inflation driving up costs, and the threat of recession weighing. At the same time, earnings estimate cuts by analysts have been lagging, leaving room for big surprises and dramatic post-earnings moves.
Traders are bracing for price swings of anywhere from 4% to 13% in the FAANG cohort after they report second-quarter results, according to data compiled by Bloomberg. The five megacaps account for about 16% of the S&P 500 Index’s daily performance.
The Nasdaq 100 Index fell 2.1% on Monday, a retreat after a five-day gain.
Among factors investors will focus on are company comments on consumer demand, the impact of inflation on margins, the hit from a strong dollar and ongoing supply chains woes.
There will be different dynamics at play, depending on the sector. Anything consumer related is likely to be very challenged,” said Aaron Dunn, a portfolio manager at Eaton Vance Management. “Pricing is another major question. If you have strong pricing power, your trough valuation will be better in this environment.”
Estimates Vs. Reality
A 27% selloff in the tech-heavy Nasdaq 100 Index this year has lowered stock valuations, but apparent bargains may be a mirage if poor results prompt analysts to slash earnings forecasts.
Earnings estimates have started to come down for some companies, including Amazon.com Inc. and Alphabet Inc., but maybe not enough, according to Eaton Vance’s Dunn, who oversees more than $4 billion.
“We’re going to need some kind of recalibration,” he said, referring to earnings outlooks this season.
Wall Street expects tech earnings to rise almost 13% this year -- a consensus that hasn’t changed much in recent months despite growing economic headwinds. If estimates fall dramatically, stocks will look expensive, underlining their downside potential in a slowdown.
Demand for Tech
Investors parsing results for clues on consumer and enterprise demand have so far received mixed signals. Micron Technology Inc.’s disappointing outlook pointed to weaker trends for phones and computers, while a beat from Samsung Electronics Co. was more reassuring.
The hardware group has “the most downside risk” if there’s a bigger downturn in demand, Goldman Sachs analyst Rod Hall wrote in a report last week, picking out Apple Inc. and Hewlett Packard Enterprise Co. as those most at risk.
Beyond hardware, investors are bracing for a chip cycle downturn and expect the market for online advertising -- the primary source of revenue for companies like Meta Platforms Inc. -- to soften.
Cloud computing and cybersecurity look more resilient, with Morgan Stanley pointing to a “durable security spending environment” against an uncertain macro backdrop.
Margins and Inflation
Costs are soaring while intermittent lockdowns in China are exacerbating an already-strained supply chain. Investors will be closely watching how much of these pricing pressures companies can pass on to customers, and the impact on margins.
Bloomberg Intelligence data indicates that tech’s operating margins will be around 31% this year, a forecast that remained steady through this year, but that may come down after companies start to report.
Strong Dollar
The surging US dollar has already been flagged as a big issue for tech this quarter, with Microsoft Corp. and Salesforce Inc. both citing currency in recent guidance cuts.
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