By Louis Krauskopf
NEW YORK (Reuters) – With earnings season in full swing, bullish investors are hoping strong corporate results will halt a slide in technology stocks that has slowed U.S. stocks this year.
The S&P 500 technology sector has fallen about 6% in just over a week, losing about $900 billion in market value as rising expectations of lower interest rates and a second Donald Trump presidency have pulled money from this year’s winners to sectors that are set to suffer recessions in 2024.
The index fared somewhat better, losing 1.6% in just over a week, with declines in the technology sector partly offset by sharp gains in areas such as financials, industrials and small caps. The benchmark index is up more than 16% so far this year.
Second-quarter earnings could help tech regain the spotlight. Tesla (NASDAQ:) and Google parent Alphabet (NASDAQ:) are due to report Tuesday, the first of the “Magnificent Seven” group of large-cap stocks that have driven markets since early 2023. Microsoft (NASDAQ:) and Apple (NASDAQ:) are scheduled to report the following week.
Big tech stocks “have been at the forefront of this wave, and for good reason,” said Scott Rein, chief global market strategist at Wells Fargo Investment Institute. “They’re making money, they’re growing their earnings, and they’re in position.”
Strong results from market leaders could ease some of the concerns that have dogged large-cap companies recently, including worries about overvalued valuations and the progress highlighted by the stunning gains in stocks like Nvidia (NASDAQ: ), which is up 145% this year despite a recent decline.
On the other hand, signs of weaker-than-expected earnings or lower-than-expected AI-related spending could test the tech-dominance narrative that has powered stocks this year. That could quickly become a problem for the broader markets: Alphabet, Tesla, Amazon, Microsoft, Meta Platforms, Apple and Nvidia have accounted for about 60% of the S&P 500’s gains this year.
Market leaders are expected to post strong results. The technology sector is forecast to post a 17% year-over-year gain, while the communications services sector — which includes Alphabet Inc. and Facebook parent Meta — is forecast to post a 22% gain. Those gains are expected to outpace the S&P 500’s expected 11% gain, according to LSEG IBES.
Anthony Saglimbin, chief market strategist at Ameriprise Financial (NYSE:AMI), believes many investors were surprised by an inflation report earlier this month that reinforced expectations of a September rate cut by the Federal Reserve, sparking rotation in areas of the market that have been struggling with tighter monetary policy.
The exodus from the tech sector accelerated this week, after the failed assassination attempt on Trump over the weekend appeared to boost his standing in the presidential race.
In addition, semiconductor stocks were hit hard after a report earlier this week that the U.S. was considering tougher restrictions on exports of advanced semiconductor technology to China. The Philadelphia Semiconductor Index has fallen about 8% since last week.
“What we would advise investors to do is use some of the pullbacks in these areas as an opportunity to allocate their investments for the long term,” said Saglimbin, who believes upcoming earnings reports could ease selling pressure on big tech companies.
The spread of gains to other parts of the market has certainly encouraged some investors to be confident in the durability of this year’s rally in stocks.
During the latest session, the number of stocks gaining compared to those falling over a five-day period reached its highest rate since November, according to Ned Davis Research. Historically, when gainers outnumber decliners by at least 2.5 times, as was the case in the latest five-day period, the S&P 500 has gained an average of 4.5% over the next three months, according to NDR. “The risk is that large-cap companies will drag the popular averages lower, but history suggests that a strong upturn in supply has been bullish for stocks going forward,” Ned Davis strategists said in a report Wednesday.