Tech stocks are not doing well.
The tech-based Nasdaq100 Index has fallen around 12% in the new year so far and is on its way to posting the worst month since the financial crisis of 2008. Since the start of 2022, $1.7 trillion in value has been lost.
Are these alarming numbers a preview of the rest of the tech sector’s earnings season?
Why investors are concerned
In order to help get inflation under control, the Fed is expected to raise interest rates, which can have a negative effect on tech stocks. Tech stocks often belong to the category known as growth stocks, whose valuation is based on future profits. When interest rates are low, this valuation can be even higher, but as interest rates rise, it can be reduced.
Investors always have a number of options and, naturally, will put their money into assets that can make the most profits. In other words, stocks, bonds, and other assets are always competing for an investor’s capital.
Tech stocks are considered riskier assets. With low-interest rates, investors are more inclined to place their money in riskier assets where they can reap positive returns. However, as interest rates rise, investors begin looking for assets with less risk and better value.
Tech sector correction
Tech stocks have soared since the onset of the pandemic. With the world’s population cooped up at home, we have been using more tech goods and services than ever. As economies reopened, investors saw these pandemic-induced gains as unsustainable.
Indeed, compared to the soaring highs of a year ago, it is hard for tech companies’ performance not to fall short. Add to that, recent challenges such as supply chain disruptions and labour shortages, and it isn’t difficult to see why investors have been selling off tech shares in favour of value stocks recently.
What to look for in the upcoming earnings
You don’t want to miss the upcoming tech companies’ earnings reports because a lot depends on the two main parts of the report: earnings and guidance.
- Past earnings tell us how the company performed in the past quarter, including revenue, net income, operating costs, cash flow and more.
- Future guidance is how the company forecasts its performance in the upcoming quarters.
In the upcoming earnings reports, each part will be scrutinised by analysts and investors, and a lot is riding on what they have to say.
If tech companies report disappointing performance in the fourth quarter, meaning their earnings are not solid in the period before interest rates are expected to rise, then investors will likely turn elsewhere to find more attractive investments.
Even if the tech companies performed solidly in the fourth quarter, investors will be looking at the guidance to gauge whether to stay invested in these stocks. Promising guidance can hold the line for tech stocks, whereas gloomy predictions for upcoming quarters could generate a further sell-off of these stocks.
Weathering the storm?
The big tech earnings season is always busy for investors. January has been a rough month for the technology sector, and, therefore, the build-up and suspense this time is even greater than usual. It remains to be seen how tech stocks will weather this particularly challenging earnings season.
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