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Earnings Season Might Bring Relief to Battered Tech Sector

Earnings Season Might Bring Relief to Battered Tech Sector

After years of outperformance, the red-hot U.S. stock market appears to have hit the skids. The S&P 500 is down 7.7% in the new year, on track for a 3rd consecutive weekly decline for the first time since September 2020 in what is shaping up as an annus horribilis thanks to a hawkish Fed. The buy-the-dip scenario that started building up mid-week quickly evaporated and stocks are looking at losses for every day this week. 

The financial markets have lately come under heavy selling pressure after it emerged that the Federal Reserve will likely raise interest rates sooner and more frequently than earlier anticipated.

In a research note, Goldman Sachs’ Jan Hatzius has warned that rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, with the central bank now likely to raise interest rates four times this year and start its balance sheet runoff process in July, if not earlier.

The risk-off sentiment has been taking a heavy toll on the high-flying tech sector, and technology stocks have officially entered  correction territory after Thursday’s late Wall Street selloff.


The S&P Info Tech sector (NYSEARCA: XLK) is down 10% from its high, with key component Apple Inc. (NASDAQ: AAPL) falling below its 50-day moving average for the first time since October. The VanEck Vectors Semiconductor ETF (NASDAQ:SMH) is down 10.6% from its high.

For years, the U.S. stock market has relied heavily on the tech sector and other mega-caps for broader gains. A serious selloff by the pivotal sector, therefore, makes it much harder for lower-weighted sectors picking up the slack and spells trouble for the entire market.

Luckily, help might be on the way.

Earnings season is here with us again, and Morgan Stanley says another round of earnings beat--as many companies in the space are accustomed to doing--could improve sentiment on Wall Street.

Focus on tech earnings

MS observes that market is already shifting its focus a bit towards earnings and away from bond yields

According to FactSet data, the tech sector is expected to come somewhere in the middle of the pack as far as earnings go in the current season. The sector is expected to report 16.1% revenue growth for CY 2021, better than the S&P 500 average growth of 15.8% over the timeframe but only the fifth best clip behind Energy (59.1%), Materials (26.1%), Communication Services (18.9%) and Consumer Discretionary (17.5%).

The tech sector is estimated to report earnings growth of 28.0% for CY 2021, well below the S&P 500 average of 45.1% for the period.

Nevertheless, the tech sector remains highly rated, with analysts most optimistic on Energy (67%), Communication Services (62%), InformationTechnology (62%), and Health Care (61%) sectors, with the four sectors having the highest percentages of Buy ratings.

On the other hand, analysts are most pessimistic on the Consumer Staples (42%) sector, as this sector has the lowest percentages of Buy ratings. This sector also has the highest percentage of Hold ratings (48%) and Sell ratings (10%).

Source: FactSet

Netflix selloff

Of the major tech companies, only Netflix Inc. (NASDAQ: NFLX) has reported Q4 2021 results so far--and it’s not been pretty.

NFLX stock has crashed 24.7% in Friday intraday trading after the video streaming giant reported healthy top-and bottom-line growth but provided underwhelming growth forecast for its subscriber base.

Netflix reported Q4 GAAP EPS of $1.33, beating the Wall Street consensus by $0.50; operating income of $6.2 billion rose 35% year over year while revenue of $7.71B (+16.1% Y/Y) was in-line with expectations.

And now the key metric: Global paid net subscriber additions clocked in at 8.28 million vs 8.19 million expected, according to StreetAccount estimates.

For 2022, the company said it’s currently targeting an operating margin of 19%-20% with free cash flow expected to be positive for the full year 2022 and beyond.

But the good news ended there.

Netflix shocked Wall Street after saying it expects to add 2.5 million subscribers during the first quarter of 2022, far below the 3.98 million it added in Q1 2021. Meanwhile, analysts had expected 6.93 million in the first quarter, according to StreetAccount estimates.

Netflix finally conceded that increased competition from other companies was one reason for the slowdown, though in the past it had said companies like Apple and Disney wouldn’t materially affect growth.The company said it’s planning for a more back-end weighted content slate in the first quarter, with big premieres set for March, but that failed to pacify investors as you can already tell from the massive selloff.

Other big tech earnings are on tap as follows:

Meta Platforms Inc. (NASDAQ: FB) is scheduled to report Q4 2021 earnings on Feb. 2, 2022 after the market closes. The company has a consensus ESP forecast of $3.85.

Amazon Inc. (NASDAQ: AMZN) is expected to report Q4 2021 earnings on Feb. 3, 2022 before the market opens. The company has a consensus ESP forecast of $3.73.

Apple Inc. is expected to report Q1 2022 earnings on Jan. 27, 2022 after the market closes. The company has a consensus ESP forecast of $1.89.

Alphabet Inc. (NASDAQ: GOOG) is scheduled to report Q4 2021 earnings on Feb. 1, 2022 before the market opens. The company has a consensus ESP forecast of $27.65.

Microsoft Inc. (NASDAQ: MSFT) is scheduled to report Q2 2022 earnings on Jan. 25, 2022 after the market closes. The company has a consensus ESP forecast of $2.31.

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