Wall Street analysts are starting to cut earnings estimates for some of the world’s biggest technology companies, undermining the argument that their stocks look cheap after this year’s market rout.
Amazon.com Inc., Nvidia Corp. and Alphabet Inc. are among those that have seen earnings estimates fall over the past month amid growing speculation that the Federal Reserve’s aggressive path of interest-rate hikes will trigger a recession. JPMorgan Chase & Co. on Wednesday lowered estimates on 26 internet companies, including Twitter Inc. and Spotify Technology SA.
For months, estimates for many megacaps held firm even as soaring costs and surging interest rates torched trillions of dollars from market values. With angst over the risk of a recession building, analysts are starting to step back from their rosy assessments before the second-quarter earnings season starting next month. That has them edging closer to the many investors who have been anticipating weaker profits.
“Corporate America has done an amazing job at passing on pricing pressure but I’m not sure that continues,” said Bob Doll, chief investment officer at Crossmark Global Investments. “The earnings picture is going to get a little darker.”
Tech stocks dipped on Wednesday, with the Nasdaq 100 Index down 0.3%.
Estimates for the vast majority of companies in the S&P 500 Index have remained steady. In fact, profits from companies in the benchmark are projected to expand more than 10% this year, up from a forecast of 8.7% at the start of the year, according to Bloomberg Intelligence.
The aggregate forecast for 2022 earnings per share for the tech-heavy Nasdaq 100 Index, though, peaked in February and has since fallen almost 3%, according to Bloomberg data.
For battered tech stocks, falling estimates raise the prospect of more selling pressure as the denominator in the price-to-earnings ratio sinks, making the equities look more expensive. That throws up a hurdle to a sustained rally in the S&P 500, considering the sector has the biggest weighting in the index.
Shrinking Valuations
After dropping 29% in 2022, the Nasdaq 100 is priced at about 19 times projected profits, close to the lowest since the start of the pandemic, and down from a peak of 31 after the Fed unleashed a flood of stimulus in 2020.
If profits do in fact start to shrink, that would erode the argument that many stocks are in bargain territory, says Michael Arone, chief investment strategist at State Street Global Advisors’ U.S. SPDR business. He estimates that earnings projections could fall as much as 40% to accurately reflect slowing growth and the persistent inflation that’s threatening margins.