Tech rally faces a reckoning ahead of tough earnings season | Bloomberg News

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This year’s 20 percent rally in United States technology stocks is decoupling from reality ahead of what’s predicted to be a gloomy reporting season, the latest MLIV Pulse survey shows. Know more:

This year’s 20 percent rally in United States technology stocks is decoupling from reality ahead of what’s predicted to be a gloomy reporting season, the latest MLIV Pulse survey shows.

“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 in London. “It’s being driven by expectations the Federal Reserve will start cutting rates as a recession becomes evident, and not necessarily by company fundamentals.”

“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 percent gain in the first quarter has been mostly powered by a handful of the sector giants. Analysts estimate US tech earnings plunged 15 percent in the three months through March, with companies hit by high costs and slowing demand.

Tech stocks are also looking expensive. The Nasdaq 100 is trading at 24 times its forward earnings, well above its long-term average of 19 and the S&P 500’s multiple of 18, according to data compiled by Bloomberg. JPMorgan Chase & Co. and Citigroup Inc. will provide a first look when they report results on April 14. Analysts still project a profit increase of 4.2 percent for US financials in the first quarter, data compiled by Bloomberg Intelligence show.

While some recent data show an easing in price pressures, market strategists including Morgan Stanley’s Michael Wilson have warned that profit margin expectations are still too high.

 

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