Note: The following is an excerpt from this week’s
Earnings Trends
report. You can access the full report that contains detailed historical actual and estimates for the current and following periods,
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Technology stocks have been at the receiving end of the ongoing market reset in response to the Fed’s tightening policy. The ‘long duration’ nature of many Tech companies, with the bulk of their profitability way out in future years, left them vulnerable to rising interest rates.
You can see the effect of this development in the chart below that plots the year-to-date performance of the Zacks Technology sector (blue line: -24.1%) and the S&P 500 index (red line: -13.2%). The chart also shows the year-to-date performance of the Zacks Finance sector (orange line: -8.8%) and the Zacks Energy sector (green line: +38.4%).
Image Source: Zacks Investment Research
The pullback in the Tech sector has taken down valuations for the space to pre-Covid levels, as the chart below shows.
Image Source: Zacks Investment Research
The chart shows that the Zacks Tech sector is currently trading at 20.9X forward 12-month EPS estimates, which is roughly -27% below where the sector traded at the start of the year and about where the sector was trading at the end of 2019.
The Tech Sector’s Earnings Outlook
We have discussed thus far how the sector’s stock price performance and valuation multiples have evolved during the ongoing market pullback. Let’s go into the sector’s earnings picture now.
The Zacks Tech sector is expected to earn -8.8% less earnings in 2022 Q2 compared to the year-earlier period on +2.7% higher revenues. This means that the sector will suffer another quarter of margin compression in Q2, after going through the same thing in 2022 Q1, when earnings were up +4.5% on +8.8% higher revenues.
But as you can see in the chart below, the sector’s earnings growth is currently expected to turn positive in the last quarter of the year.
Image Source: Zacks Investment Research
You can see this in the sector’s annual earnings picture as well, with earnings growth expected to rebound from next year onwards, after decelerating this year.
Image Source: Zacks Investment Research
We see a comparable growth trend for the ‘Big 5’ Tech players – Apple
AAPL
, Amazon
AMZN
, Alphabet
GOOGL
, Meta
FB
and Microsoft
MSFT
– as well.
Total Q2 earnings for the Big 5 are expected to decline -16.2% from the year-earlier level on +6.9% higher revenues. This would follow the -8.4% earnings decline on +11.4% revenue growth in 2022 Q1, as the chart below shows.
Image Source: Zacks Investment Research
The ‘Big 5’ earnings growth is expected to resume next year, after declining this year, as the chart below shows.
Image Source: Zacks Investment Research
Continued negative sentiment on the sector would imply that the market is very skeptical of these earnings expectations and thinks they are at risk of negative revisions. There has been some downward adjustment to Tech sector estimates for 2022 thus far, but they are very modest and nowhere near what has happened on the price front.
Keep in mind that the Tech sector is the biggest earnings contributor to the S&P 500 index, bringing in roughly a quarter of the index’s total earnings. As such, Tech earnings have broad implications.
The Overall Earnings Picture
Beyond the Tech sector, total Q2 earnings for the S&P 500 index are expected to be up +2.1% from the same period last year on +9.4% higher revenues. This is a significant deceleration from what we have been seeing in the preceding quarters, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.
Image Source: Zacks Investment Research
There is a rising degree of uncertainty about the outlook, being driven by a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening.
The Ukraine situation is exacerbating pre-existing supply-chain issues, which combined with its impact on oil prices, is weighing on the inflation situation in hard-to-predict ways. The evolving earnings revisions trend will reflect this macro backdrop.
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