A trader works at the New York Stock Exchange NYSE in New York, the United States, Sept. 13, 2022. Credit – Michael Nagle—Xinhua/Getty Images
With a slew of tech companies reporting financial results this week, all eyes are on investor reaction after a series of recent disappointing results from the biggest names in tech, including Alphabet, Microsoft, Meta and Amazon, have rattled investors on the outlook for the industry. .
As tech stocks continued to take a beating this week, Wall Street analysts warn this could be bad news for the economy as a whole, as lackluster earnings results likely point to inflation and interest rates high interest rates weigh more than expected on households and businesses.
The latest crisis adds to an already disappointing year for tech stocks, which were among the biggest winners at the start of the pandemic. The tech-heavy Nasdaq has lost nearly 30% of its value this year, compared to the S&P 500’s 19% decline since the start of 2022. The Nasdaq’s fall accelerated at the end of last week by weak third-quarter earnings for Alphabet, Microsoft, Meta, and Amazon, all industry heavyweights that financial analysts often turn to when assessing the outlook for the economy.
This quarter’s earnings season will go down in the history books “as one of Big Tech’s worst” and could be a “crossroads moment” for some of the biggest companies, analyst Dan Ives wrote. at Wedbush Securities, in a recent research note.
“In this softer macro and a likely recession upon us, Big Tech management teams must adapt quickly to a very different backdrop or risk losing their luster for investors who have bet on these tech thoroughbreds. over the past decade,” he said.
Among the big tech companies, Apple has been an outlier lately. Its shares are down nearly 16% since the start of the year, but in the past month its share price has risen more than 7%, thanks in large part to an increase in Mac sales and the growth revenues. Analysts say Apple is in better shape than its Big Tech peers as demand for its products remains high around the world, even in emerging markets, despite falling global sales of smartphones and PCs.
This week, analysts will turn their attention to a host of smaller tech companies, including AirBnB, eBay, Qualcomm, Paypal, Uber and Zillow, for a deeper reading of economic forecasts.
Here’s what you need to know about falling tech stocks.
Why Tech Stocks Are Falling
Wall Street analysts say a number of factors are cutting the wind in the markets, including the highest inflation in 40 years, rising interest rates and the strength of the US dollar, which is hurting multinationals since they earn less when they convert their sales abroad into dollars. .
The Federal Reserve last raised interest rates in September by 75 basis points, meaning consumers will pay more for interest on auto financing and other loans. Analysts say the rapid rise in interest rates has left investors wondering if stocks that have thrived in a low interest rate environment could continue to do well in a higher interest rate environment. Uncertainty and a plethora of question marks is one of the reasons why investors are taking less risk on tech companies, which tend to perform worse when interest rates are higher and the borrowing is more expensive.
Such moves may worry Wall Street as investors worry that rising interest rates will make borrowing more expensive for businesses and households, stifling economic growth and possibly leading to a recession.
Tech companies are also finding it harder to grow sales as digital advertising and other revenue streams slow. “All of these businesses are dependent to some degree on advertising revenue,” says Emily Bowersock Hill, managing director of Bowersock Capital Partners, a money management firm. “It’s a real sign of weakness in the economy that those earnings are going down,” adds Bowersock Hill, who is also chair of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion. dollars.
Microsoft, which is down 1.59% at the close on Monday, reported its weakest quarterly revenue growth in five years, strangled by rising energy costs and a slump in Windows software sales to manufacturers of personal computers. Sales growth in its cloud business was also lower than analysts had hoped.
Alphabet, Google’s parent company, said its profits fell 27% from a year earlier as advertisers spent less on marketing for insurance, loans and mortgages. The company’s revenue of $57.27 billion was also slightly below Wall Street expectations. Its stock is down 1.85% at Monday’s close.
Meta’s stock fell to its lowest level since 2016 on Thursday, down more than 20%, after reporting a second quarterly decline in revenue and rising costs at its money-losing Metaverse division. Meta’s stock fell another 6.09% as it closed on Monday.
Amazon shares plunged 7% on Friday after the company predicted weaker holiday sales than analysts had expected. The company’s cloud business has also reported its slowest growth rate since 2014. Amazon fell another 0.94% as it closed on Monday.
“When we get these kinds of declines, it’s a clear signal that the economy is slowing down,” says Bowersock Hill. “The fact that Big Tech earnings are worse than expected is an important indicator for the broader economy.”
The hard road ahead
Despite the uncertainty surrounding Big Tech stocks, the overall economy is not in very bad shape. Usually, when consumers feel bad about the economy, they begin to cut spending, which accounts for more than two-thirds of all national economic activity. But consumer spending rose in the July-September quarter and the US economy returned to growth, ending two straight quarters of economic contraction despite high inflation and high interest rates.
Even so, disappointing earnings from tech heavyweights could tip the broader market south, given the immense market value of these stocks and the industry’s tendency to foreshadow the direction the industry is heading. ‘economy. Tech stocks are particularly sensitive to inflation, rising interest rates and a strong dollar, as is the economy as a whole.
“It looks like we are going into a recession and tech companies need to prepare for it,” says Dr. Soudip Roy Chowdhury, CEO of Eugénie.ai, a sustainability tech company. “Some of the biggest tech companies are already slowing down hiring, some will lay off.”
Alphabet CEO Sundar Pichai said on the company’s earnings call that Alphabet should be “responsive to the economic environment”, suggesting cost-cutting measures such as layoffs are coming. . Additionally, Amazon Chief Financial Officer Brian Olsavsky said the company “would be taking steps to tighten its belts, including suspending hiring at certain businesses and removing products and services where we believe our resources are better spent elsewhere”.
But financial analysts like Bowersock Hill don’t think the market will see the same lows as earlier this summer, when investors sold shares of everything from semiconductor companies to gadget makers, at least not for the moment. “We may not see the full earnings impact of rate hikes and significant dollar appreciation until the fourth-quarter earnings season,” she says. “We are going to have a difficult winter. I think Big Tech earnings are just indicators of the cracks that are starting to appear.
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