This is one of the biggest weeks of the year for technology company earnings, to the point that the Federal Reserve’s interest-rate decision Wednesday could be something of an afterthought.
Economists predict the central bank will raise rates by another 75 basis points as it seeks to combat surging inflation. While higher rates have been the primary headwind to tech stocks this year, investors say the policy path is now priced in, especially since consumer inflation expectations are falling, suggesting the Fed may be able to be less hawkish.
And two titans of the tech industry are giving investors cause for optimism: Microsoft Corp. late Tuesday gave an encouraging sales forecast, while Google parent Alphabet Inc. reported resilient ad revenue. The Nasdaq 100 index rose 1.5%, with Microsoft up 3.7% and Alphabet gaining 3.2%.
“The market is comfortable with the path of hikes, and if rates are stabilizing here, that should be a good backdrop for growth stocks to come back again,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, who has been taking profits on energy stocks and rotating into tech, while also telling clients to add to the sector.
Because the Fed is a known quantity, Janasiewicz added, earnings will be critical for the market. He is focused on how margins are holding up amid inflation, and on how much consensus estimates may need to fall.
The Nasdaq 100 has risen 10% from its June low, and recently broke above its 50-day moving average for the first time since April, a positive signal for near-term momentum. It is on track for its biggest one-month percentage gain since October but remains down about 25% this year. The yield on the 10-year Treasury is below 2.8%, down from a June peak of almost 3.5%.
The Fed’s meeting comes in a busy week for earnings. Apple Inc., Amazon.com Inc., and Facebook parent Meta Platforms Inc. are all scheduled to report this week.
So far this earnings season, about 80% of technology companies in the Nasdaq 100 have reported better-than-expected earnings and revenue, according to data compiled by Bloomberg.
Of course, the macroeconomic backdrop remains a key factor behind earnings and corporate outlooks. Matt Calkins, the chief executive officer of enterprise software company Appian Corp., is so concerned about inflation that he wants the Fed to be extremely aggressive, raising rates by 100 or 125 basis points.
“We need to either get inflation back in the box, down to 2% again, or we will need to end up with some kind of long-term acceptance of higher inflation,” he said in a phone interview. A recession is inevitable, he said, and “the main issue is whether we will still have inflation on the other end.”