Anyone distracted by the Reddit-fueled circus in action this month may have missed an important fundamental story: a stellar earnings season for tech companies that helped the group’s shares outperform the market.
With more than half of the S&P 500 book earnings reports, tech companies like Skyworks Solutions Inc. and Paypal Holdings Inc. it is at the forefront of all other key sectors in the benchmark, with over 95% above profit estimates, according to data compiled by Bloomberg. In terms of revenue, 88% exceeded estimates.
The strong presentation helped relaunch earnings for technology stocks after months in which the group lagged behind cyclical sectors, such as industries, which tend to benefit the most in a recovering economy. Since the earnings season began on January 15, the S&P 500 Information Technology Index has gained 6.2%, second only to the communications services group that includes technology giants such as Alphabet Inc. and Facebook Inc.
“They’ve had great gains that you just can’t ignore,” said Gary Bradshaw, portfolio manager at Hodges Capital Management, about the technology companies. “This season of earnings shows that they will continue to grow at a solid pace.”
In 2021, technology stocks were expected by many to perform poorly compared to other industries ready for faster earnings growth. A key pillar of their strength last year – digital services and hardware that were in such high demand during the Covid-19 pandemic – would fall along the way as vaccines slowly brought normalcy back into the economy, or so Went .
So far, strong demand has shown little sign of declining. Wall Street took note of the performance and raised earnings estimates after keeping them flat for months. Analysts now project an 11% increase in profit in the fourth quarter, a fourfold increase from two weeks ago. Earnings estimates for the first three months of 2021 have risen 40 percent since early January, the largest advance among the industry’s top 11 groups, according to data compiled by Bloomberg Intelligence.
One area of concern for bulls is the lethargic reactions of stocks to good earnings reports from the largest technology companies in the US. Of the five largest stocks on the market, Alphabet Inc. and Microsoft Corp. are the only companies whose shares are larger after earnings reports. Since then, Google parent has gained 8.8% reporting earnings per share on February 2, which exceeded analysts’ highest estimates, while Microsoft advanced 4.3% since January 26.
Despite exceeding estimates for almost every metric, Apple fell 3.7% from its report. Amazon.com Inc., whose revenue forecasts far exceeded analysts’ estimates, falling 0.8% from its February 2 results.
Sky-High ratings
Deactivated investor enthusiasm is likely linked to higher valuations, compared to bargains in cyclical sectors and hidden antitrust risks, according to Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.
“These are great companies that are very profitable and can adapt to the environment and offer them to shareholders,” he said. “The things that relatively hinder them are still there and I’m not convinced they will outperform in 2021.”
Some of the the biggest surprises came from chip makers like Skyworks solutions and software companies like it ServiceNow Inc. Both shares have gained at least 12% since the publication of the results.
Among the companies that report earnings next week is the network giant Cisco Systems Inc., a social media company Twitter Inc. and the online travel company Expedia Group Inc.
S&P 500 technology stocks trade at reported profits 36 times, compared to less than 32 for the broader index. Concerns about potential regulations should make it harder for technology companies to outperform, given the premium they get from trading the group near the most expensive valuation multiples in nearly two decades, according to Matt Maley, chief market strategist the Miller Tabak + Co.
“With the new administration, there will be a more diligent effort to adopt real regulation against some of these technological megacaps,” Maley said. “It will not kill them or produce bubbles, but this could create a headwind and this is a real concern that many investors have. This is one of the few things on which there is bipartisan support. ”