(Bloomberg) -- Technology stocks have been on a tear over the past month, but behind the scenes the big picture for the sector’s profits has only gotten darker.
Analyst estimates for 2022 profit growth at S&P 500 tech companies have fallen about two percentage points since second-quarter earnings reports kicked off in July, according to data compiled by Bloomberg Intelligence. The decline has been even greater for 2023 projections, as Wall Street braces for a potential recession and slower revenue growth.
At a time when the Federal Reserve is still aggressively hiking interest rates and inflation remains high, the deteriorating profit outlook is making many investors skeptical that the furious rally in the Nasdaq 100 Index is sustainable.
“It’s highly illogical what’s going on right now,” said Mike Mullaney, director of global market research at Boston Partners. “If you look at the underlying facts, it doesn’t make a lot of sense.”
The Nasdaq 100 has gained 19% since closing at a nearly two-year low on June 16 as of the end of last week. The rally has been fueled by better-than-feared results from megacaps like Microsoft Corp., a decline in US Treasury yields and speculation that the economy may be able to skirt a recession. Technology stocks had simply fallen further than could be justified by fundamentals, bulls contend.
Apple Inc. has gained 27% from the June low and sits less than 10% below the stock’s January record. Amazon.com Inc. has rallied back 36% and is threatening to overtake Alphabet Inc. in market value.
With estimates falling and stocks rising, the S&P 500 technology sector’s price-to-projected earnings ratio now sits more than 20% above the average for the index, according to Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper.
“Even an average premium is tough to justify with rising rates, negative estimate revisions and earnings expected to trail the market” until at least the second half of 2023, they wrote in a research note last week.
For Mark Haefele, chief investment officer at UBS Global Wealth Management, while the rally is encouraging, it’s too soon to aggressively move back into growth stocks.
“With near-term uncertainty around inflation, Fed policy, and global growth, we continue to favor investing in value with a quality tilt,” he said.
Tech Chart of the Day
The Philadelphia Stock Exchange Semiconductor Index has gained for five weeks, its longest streak of the year. A steady recovery in tech stocks and a series of positive earnings reports by chip firms has helped the index rebound from its July low. The index fell 1% on Monday, after Nvidia Corp. issued a revenue forecast for its fiscal second quarter that fell far below an earlier estimate due to a weaker outlook in the gaming industry.
Top Tech Stories
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- Amazon.com Inc. is barreling ahead with an aggressive acquisition strategy despite intense antitrust scrutiny in Washington, with its $1.65 billion deal to buy Roomba vacuum maker iRobot Corp. as the latest example.
- Baidu Inc. has won approval to deploy the first fully autonomous self-driving taxis on China’s roads, giving it an edge over rivals like Pony.ai Inc. and XPeng Inc.
- Tom Alberg, co-founder of the venture capital firm Madrona Venture Group and an early investor in Amazon, has died. He was 82.
- Alphabet Inc.’s Google was sued by an early adopter of its Workplace cloud productivity software who claims the company reneged on a promise to provide it with free access to the program for life.
- Veon Ltd., the third-largest mobile-phone operator in Russia, may need to freeze its network rollout in the country if sanctions over the war in Ukraine continue to block imports of essential equipment, according to Chief Executive Officer Kaan Terzioglu.
- Twitter Inc. co-founder Jack Dorsey tweeted the words “end the CCP” over the weekend in response to a report about China’s strict Covid-19 measures.
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