“Stocks look deceptively cheaper because estimates haven’t fallen,” Arone said. “Current estimates suggest growth north of 10%, but they need to be reduced to reflect a cyclical slowdown, if not something worse.”
Of course, not all megacap estimates are dropping. Projections for Apple Inc. and Microsoft Corp., the two most valuable American companies, have barely budged, although their stocks have tumbled more than 20% this year.
Earnings Season
There have been signs that this earnings season may bring more gloom for technology investors. In May, Snapchat owner Snap Inc. blamed a sudden slowdown in its advertising business on a weakening economic outlook, sending jitters through the ranks of companies that rely on digital ads as their main source of revenue. A week later, Microsoft cut forecasts as a result of the surging dollar, which reduces the value of American companies’ overseas earnings.
The five companies with the greatest weighting in the S&P 500 -- Apple, Microsoft, Alphabet, Amazon and Tesla Inc. -- are projected to see second-quarter profits drop by more than 20% from the same period a year ago, when their earnings jumped 88%, according to Bloomberg Intelligence.
For Citigroup Inc.’s Scott Chronert, all of the bearish expectations could set stocks up for a strong second half of the year if earnings aren’t as bad as feared. He expects profits to hold up and projects the S&P 500 to rally about 10% by year-end, the strategist wrote in a research note Monday.
Earnings releases in the weeks ahead are going to be crucial for investors in deciding whether that bullishness is warranted.
“Given what we know of slower economic conditions, the dollar’s strength and the impact that has on multinational profits, and margins coming under pressure, I think consensus estimates seem rather ambitious,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
-With assistance from Matt Turner and Subrat Patnaik.
This article was provided by Bloomberg News.