Microsoft kicks off tech earnings set to slump most since 2016

Wall Street has been slashing earnings estimates for months for the tech sector, which is projected to be the biggest drag on S&P 500 profits in the fourth quarter.

US technology stocks are about to hit their next hurdle when earnings season for the most influential segment of the S&P 500 Index gets underway in the coming week, vanishing profits.

The tech-heavy Nasdaq 100 Stock Index enters this crucial stretch amid a darkening backdrop that short-circuited a strong start to the year.

Underscoring the risks ahead, Microsoft which kicks off the group’s reporting on Tuesday, joined Amazon in starting to cut thousands of jobs as sales slow.

Microsoft plans to slash its overall workforce by 12,000 jobs, or more than 6%, and the fate of approximately 4,000 direct employees with Google in Ireland is still uncertain.

Minister for Enterprise, Trade and Employment Simon Coveney has not received a collective redundancy notification in relation to any potential redundancies at Google’s operations in Ireland yet.

However, he is scheduled to meet the head of Google Ireland next week to discuss a number of matters including the potential impact of global jobs cuts on operations here.

Google parent Alphabet followed Microsoft with plans of its own to shrink its workforce.

Earnings estimates

Wall Street has been slashing earnings estimates for months for the tech sector, which is projected to be the biggest drag on S&P 500 profits in the fourth quarter, data compiled by Bloomberg Intelligence (BI) show.

The danger for investors, however, is that analysts still prove too optimistic, with demand for the industry’s products crumbling as the economy cools.

“Tech is driving a lot of the overall earnings recession that we’re seeing in the S&P,” said Michael Casper, an equity strategist with BI.

“While there’s a lot baked in, depending on if this recession does emerge and how badly it occurs, there is certainly some negative revision risk for the sector still,” he said.

Firms including Texas Instruments, Lam Research, and Intel also report next week.

Apple, Alphabet and other behemoths announce the week after. The group has huge sway over the path of the overall market, with info-tech accounting for more than 25% of the S&P 500’s market capitalisation.

Fourth-quarter earnings for tech firms in the benchmark are projected to drop 9.2% from the same period a year earlier, the steepest slide since 2016, data compiled by BI show.

The speed of the deterioration in sentiment is notable. Three months ago, Wall Street merely saw profits coming in flat.

Revenue growth

Revenue growth for these companies is fading relative to the past couple of years, when the pandemic and ensuing lockdowns supercharged sales for everything from digital services to personal computers and the components that power them. Higher costs are also squeezing profits.

The concern, however, is that valuations are still far from cheap despite last year’s 33% tumble in the Nasdaq 100. The gauge is priced at about 21 times profits projected over the next 12 months, compared with an average of 20.5 for the past decade, and further estimate cuts would only make it look more expensive. The multiple bottomed at 17.7 in 2020 and at 11.3 in 2011, in the wake of the recession that ended in 2009.

Still, for Sameer Bhasin, principal at Value Point Capital, most of the bad news has been priced in. He anticipates that first-quarter profit estimates may have further to fall, but says some of the fears are overblown.

“Tech isn’t suffering from an industry demand issue, it’s suffering more from a digestion of the excesses that were built in during the pandemic,” he said. “There’s money on the sidelines that is waiting to be put back into the sector.” Analysts anticipate that tech profits will return to growth in the second half of the year, data compiled by BI show. That will make executives’ outlooks for the full year all the more critical for stocks.

As earnings roll in over the next few weeks, investors will have plenty of risks to monitor.

Among them are the possibility that inflation proves to be more entrenched than many expect, as well as the effect of higher rates on profits, says Nick Getaz, a portfolio manager of the Franklin Rising Dividends Fund.

“Monetary policy has a lag and we’re likely still in the window of that,” he said. “We haven’t seen the earnings impact you’d expect to see from rate hikes.”

Bloomberg, with additional reporting by the Irish Examiner