As earnings season goes into full swing, bullish investors hope solid corporate results will stem a recent tumble in technology shares that has cooled this year’s U.S. stock rally.
Tesla and Google-parent Alphabet both report on Tuesday, kicking off results from the “Magnificent Seven” megacap group of stocks that have propelled markets since early 2023. Microsoft and Apple are set to report the following week.
Strong results from the market’s leaders could assuage some of the worries that have recently dogged megacaps, including concerns over stretched valuations and an advance highlighted by eye-watering gains in stocks such as Nvidia, which is up 145 per cent this year despite a recent dip.
On the other hand, signs that profits are flagging or artificial intelligence-related spending is less than anticipated would test the narrative of tech dominance that has boosted stocks this year. That could turn quickly into a problem for broader markets: Alphabet, Tesla, Amazon.com, Microsoft, Meta Platforms, Apple and Nvidia have accounted for around 60 per cent of the S&P 500′s gain this year.
Corporate results for the market’s leaders are expected to meet a high bar. The tech sector is projected to increase year-over-year earnings by 17 per cent, and earnings for the communication services sector - which includes Alphabet and Facebook parent Meta - is seen rising about 22 per cent. Such gains would outpace the 11 per cent estimated rise for the S&P 500 overall, according to LSEG IBES.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, believes many investors were caught off guard by a U.S. inflation report earlier this month that all-but-cemented expectations of a September rate cut by the Fed, sparking a rotation into areas of the market that have struggled under tighter monetary policy.
The move out of tech accelerated last week, after a failed assassination attempt on Trump appeared to boost his standing in the presidential race.
In addition, semiconductor shares were hit hard after a report earlier this week said the United States was mulling tighter curbs on exports of advanced semiconductor technology to China.
“What we’re advising investors to do is use some of the pullbacks in these areas as an opportunity to allocate on a longer-term basis,” said Saglimbene, who believes the upcoming earnings reports could ease the selling pressure on Big Tech.
To be sure, the widening of gains to other parts of the market has heartened some investors over the durability over the rally in stocks this year.
During the recent rotation, the number of stocks gaining compared to those declining over five days 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 last week, the S&P 500 has rallied an average of 4.5 per cent over the next three months, according to NDR.
“The risk is that mega-caps pull the popular averages lower, but history suggests that strong breadth improvements have been bullish for stocks moving forward,” Ned Davis strategists said in a report on Wednesday.
-- Reuters
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Question: My wife and I manage more than $2-million of assets in several accounts with TD Direct Investing, including a registered retirement savings plan, registered retirement income fund and tax-free savings accounts. We are thinking it is prudent to draw down something in the order of 20 per cent to 25 per cent because we fear the market is getting a bit frothy. Our question is where to park a large quantity of money, make a little bit while we wait, and still have liquidity and access to our cash if buying opportunities present.
Answer: I understand your desire to protect your capital. But the truth is that you don’t know where markets are going next. Nobody does. If you sell and a correction comes, you’ll feel like a genius. If you’re wrong and stock prices rise, you’ll be kicking yourself. Then you’ll have another decision to make: Do you get back in, possibly at higher prices, or keep waiting for that elusive correction?
Rather than try to time the market’s ups and downs, which nobody can do consistently, there’s a better way: Choose an allocation of stocks and fixed income that suits your risk tolerance, then resist the urge to tinker with your portfolio.
If you do decide to sell some of your stocks, you have a few options for parking your cash. I go over them here.
--John Heinzl
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