The trouble in megacap tech is not stopping and earnings from some of the industry's most-prominent names are adding to investor's list of worries.
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Marquee companies like Apple and Microsoft Corp., which are due to report their results next week, have come under additional pressure, with the Nasdaq 100 now on pace for its worst month since the 2008 financial crisis. A grim outlook from streaming giant Netflix Inc. was the latest excuse to sell tech shares, with some analysts saying more pain could be ahead as the earnings season continues.
More than 1.7 trillion in value was erased from the Nasdaq 100 in January, with the tech-heavy gauge entering a correction this week after falling more than 10% from a recent peak. The industry that powered the bull-market rally from the depths of the Pandemic has recently suffered from concern that skyrocketing valuations, the potential for slowing earnings and Federal Reserve tightening will make it harder to justify more gains going forward.
Michael O Rourke, Chief Market strategist at JonesTrading, said that we don't know where valuations will be, but we do know that the economic environment and the monetary policy backdrop aren't as positive as what we had in 2020 and 2021. He said that the earnings season will provide clarity into business conditions, but megacap names continue to trade at elevated valuations.
He noted that it was a reason to be cautious.
Netflix cratered more than 20% Friday, saying it expects to add just 2.5 million users in the current quarter -- well short of Wall Street's estimates. The stock went to its worst session in nearly a decade after the selloff, dragging down peers. After plunging 20% from its September peak, online-retail behemoth Amazon.com Inc. suffered its steepest week-on-week slide since December 2018, with losses topping 10%, and Facebook parent Meta Platforms Inc. entered a bear market.
Tech shares in the S&P 500 and a gauge of chipmakers had their biggest weekly losses since the outbreak of the epidemic.
The companies that benefit the most from an economic rebound have outperformed tech this year, which is one of the worst performers in the S&P 500 this year. Energy producers are the only ones in the green so far in January among the 11 major U.S. benchmarks in a rotation out of growth and into cyclical names.
It is a shift to the value that Bank of America calls one of the biggest reversals in history, with analyst Ohsung Kwon expecting the move to continue.
He said that's not yet.
Concerns about its growth prospects was raised by Netflix's outlook, which is an issue that amplifies worries over high valuations in a rising-rate environment. The yield on the 10 year Treasury approached 2% earlier this year, compared to less than 1.4% in early December. It has been seen as a problem for many investors as higher rates discount the present value of future earnings.
Jordan Klein, an analyst at Mizuho Securities, said that the upcoming results from big names in the industry will be critical against the overall weakness of the industry.
He wrote that what they offer as guidance and how stocks react is likely to tell us whether this tech selloff gets worse or better in the coming weeks.
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