The Outlook for Tech Stocks in a Rising Rate Environment



Tech stocks have been under the gun lately, as sentiment has shifted on the group with the coming Fed policy change. Under this new monetary policy regime of shrinking liquidity and rising interest rates, high growth stocks in the Technology sector become less attractive. Or at least that is the received wisdom in the market and how these sectors are expected to behave.



You can see this play out in the chart below that shows the stock market performance of the Zacks Technology sector over the past year. For comparison, the chart also includes the S&P 500 index, the Zacks Finance sector, and Microsoft

MSFT

and Apple

AAPL

shares.

Zacks Investment Research
Image Source: Zacks Investment Research



A couple of things really stand out from this chart. First, the Technology sector is at the bottom of the heap, likely a reflection of the aforementioned sentiment issue with these stocks in a tightening Fed cycle. Second, Apple and Microsoft have enjoyed notable rebounds after coming out with blockbuster quarterly results.



For the full year 2021, Apple earned $94.7 billion. Please note that we are describing earnings, not revenues. For revenues, Apple brought in $123.9 billion for Q4 and $365.8 billion for the full year.



We will see how the Q4 results from Facebook

FB

, Alphabet

GOOGL

and Amazon

AMZN

turn out to be, with Apple and Microsoft setting a high bar for them. What we do know is that these Big 5’ Tech players – Apple, Amazon, Alphabet, Facebook & Microsoft – are extremely profitable.



Take a look at the chart below that shows current consensus expectations for this group for the coming periods in the context of what they were able to achieve in 2021 Q4 and the preceding period.

Zacks Investment Research
Image Source: Zacks Investment Research



What we see here is that earnings growth is decelerating in a major way, even if we account for some upward revisions estimates in the coming days.



But notice how the revenues continue to remain strong; it is the cost pressures that are weighing on earnings expectations. This is actually the big takeaway from the current earnings picture; companies appear to be struggling to meet a historically high demand environment.



The sources of struggle are logistical bottlenecks that stopped Apple from selling more iPads and Levi’s from selling more jeans as a result of input shortages, logistical bottlenecks and rising costs. All of this is showing up in compressed margins.



Microsoft, Alphabet and Facebook aren’t as vulnerable to logistical bottlenecks as Apple and Amazon are, but they all have to pay up for those brainy engineers.



The chart below that shows the group’s earnings and revenue growth on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research



Look at the chart and note the growth trend from 2022 to 2023. In other words, whether the growth trend for these companies is decelerating or not is a function of your holding horizon. These companies are impressive growth engines in the long run.



Beyond the big 5 Tech players, total Q5 earnings for the Technology sector as a whole are expected to be up +14.2% from the same period last year on +10.6% higher revenues.



The dramatic looking chart below shows the sector’s Q4 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.



Please note that the Q4 earnings and revenue growth rates are the ‘blended’ growth rates, meaning that it combines the actual results that have come out already with estimates for the still-to-come companies. The chart would look less dramatic in its decelerating growth trend if we excluded the 2021 Q2 period from it.

Zacks Investment Research
Image Source: Zacks Investment Research



This big picture view of the ‘Big 5’ players as well as the sector as a whole shows a decelerating growth trend. That said, unlike this ‘quarterly view’, the annual picture shows a lot more stability, as the chart below highlights.

Zacks Investment Research
Image Source: Zacks Investment Research



In terms of the reporting docket, Meta Platforms (aka Facebook), Alphabet (aka Google) and Amazon are on deck to report results this week. Other notable companies reporting results this week include Spotify (SPOT), Exxon (XOM) and others.



In total, this week brings results from more than 350 companies, including 109 S&P 500 members. By the end of this week, we will have seen Q4 results from 277 S&P 500 members or 55.4% of the index’s total membership.




Q4 Earnings Season Scorecard




Including all the results that came out through Friday, January 28

th

, we now have Q4 results from 168 S&P 500 members or 33.6% of the index’s total membership. Total earnings (or aggregate net income) for these 168 companies are up +30.6% from the same period last year on +16% lower revenues, with 79.8% beating EPS estimates and 78% beating revenue estimates.



The two sets of comparison charts below put the Q4 results from these 168 index members in a historical context, which should give us a sense how the Q4 earnings season is tracking at this stage relative to other recent periods.



The first set of comparison charts compare the earnings and revenue growth rates for these 168 index members.

Zacks Investment Research
Image Source: Zacks Investment Research



The second set of charts compare the proportion of these 168 index members beating EPS and revenue estimates.

Zacks Investment Research
Image Source: Zacks Investment Research



As you can see from the above comparison charts, the Q3 numbers not only represent a growth deceleration from the first half’s blistering pace, but also in terms of the beats percentages, particularly EPS beats percentages.



For the


Technology sector


, we now have Q4 results from 54% of the sector’s market capitalization in the S&P 500 index. Total Q4 earnings for these Tech companies are up +18.4% from the same period last year on +6.3% higher revenues, with 87% beating EPS estimates and the same proportion beating revenue estimates.



The comparison charts below put the sector’s Q4 EPS and revenue beats percentages in a historical context.

Zacks Investment Research
Image Source: Zacks Investment Research




Expectations for Q4 & Beyond




Looking at the quarter as a whole, combining the actual results that have come out with estimates for the still-to-come companies, total Q4 earnings for the S&P 500 index are expected to be up +24.2% from the same period last year on +13.1% higher revenues.



The chart below presents the earnings and revenue growth picture on a quarterly basis, with expectations for 2021 Q4 contrasted with the actual growth achieved over the preceding four quarters and estimates for the following three.

Zacks Investment Research
Image Source: Zacks Investment Research



For the current period, total S&P 500 earnings are expected to increase +4.7% from the same period last year on +7.9% higher revenues. The chart below shows the revisions trend for the current period.

Zacks Investment Research
Image Source: Zacks Investment Research



The chart below shows the comparable picture on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research



For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report

>>>> Earnings Picture Remains Strong Despite Market Downturn



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