Technology’s year of efficiency faces its first major test this week as big technology earnings kick into high gear. Since the start of the year, the sector’s been on a tear, with most major names helping lift the S & P 500 and tech-heavy Nasdaq Composite 7.8% and 15%, respectively, following the worst year for stocks since 2008 . So far in 2023, companies from Alphabet to Amazon to Meta Platforms have set their sights on efficiency, announcing layoffs and cost cuts to reduce bloated headcount after their once seemingly endless growth ground to a halt last year . .IXIC YTD mountain Nasdaq Composite in 2023 Aided in 2023 by falling bond yields that last year had pressured valuations , investors found opportunities to scoop up solid companies with fortress-like balance sheets and steady cash flows at bargain prices. Lately, the artificial intelligence boom seems to be lifting any technology company betting on a generative AI wave . Year to date, all major FAANG names have risen at least at least 11.6% this year, with efficiency poster child Meta Platforms leading the pack, soaring about 77%. But as Big Tech earnings swing into turbo mode Tuesday, when Alphabet and Microsoft both report, these technology darlings now face their first major test of 2023: making it out of the earnings season unscathed. Across the information technology sector, earnings are expected to decline 15.1% year over year, according to FactSet data. If this happens, that will mark the steepest decline for the group since the second quarter of 2009. META YTD mountain Meta Platforms shares surge in 2023 The picture for communication services, including such stocks as Netflix , Alphabet and Meta Platforms, doesn’t look much brighter. Analysts anticipate a 14.9% earnings decline, the fourth straight quarter of year-over-year declines, according to FactSet. And based on the blended growth rate metric, Nasdaq-100 earnings are expected to have fallen by more than 11%. Technology giants of the past used to blow past estimates and crush expectations. Now, Wall Street says surviving this season may be as simple as beating already low expectations and reaffirming guidance amid a difficult macroeconomic backdrop. “They come into this earnings reports priced to perfection,” said Art Hogan, chief market strategist at B. Riley Financial. “So, to me, it’s not going to take too much of a disappointment for many mega cap tech names to really roll over.” The setup for technology stocks It’s hard to pinpoint one specific problem denting earnings expectations this season. Calls for slower economic growth, a Federal Reserve intent on hiking rates one more time next week to stop inflation, even if it tips the economy into a slowdown, and last month’s banking crisis all seem to be playing a role. Heading into the second quarter, many technology companies already face lowered earnings expectations, with analysts lowering earnings estimates for the information technology sector in the first quarter by 6.5% in aggregate, according to FactSet data. The number of companies issuing negative EPS guidance also sits above the five-year average. GOOGL YTD mountain Alphabet shares in 2023 “Companies that are unable to prove their secular growth and prove their multiples are going to see some harsh reactions, especially if they miss [the] bottom line,” said Anna Han, equity strategist at Wells Fargo Securities. One of the biggest concerns for investors is the steep valuations for many stocks in the sector, some of which still trade at a lofty premium. On a forward price to earnings basis, for example, Microsoft , trades at nearly 27 times next the 12 months’ earnings, while Amazon stands at more than 58 times. The P/E ratio for the benchmark S & P 500 index sits at just 18.3 times, while the P/E for the information technology sector stands at a little over 24 times. For Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, N.C., these steep valuations mean that even if technology companies beat earnings expectations, much of the upside may already have been priced in. Even if they top better-than-feared expectations, many may warn of uncertain times or point to plans to prepare for economic weakness. MSFT YTD mountain Microsoft so far this year “There’s always a possibility that some of these big market leaders give up some of their year-to-date gains just in the fact that so much good news is already priced in that it’s going to be really hard to surprise to the upside at this point,” Zaccarelli said. In October, Meta Platforms’ stock plunged double digits following disappointing earnings and a weak forecast. Just a few months later, the stock surged after topping revenue expectations and announcing its focus on a ” Year of Efficiency .” Virtus Investment Partners’ Joe Terranova told CNBC’s ” Halftime Report ” this week the reactions in these stocks this earnings season could dictate whether the S & P makes its way out of the tight trading range its been stuck in since late 2022. Yet, even if these companies fare well, guidance will likely foreshadow an economic slowdown, said Short Hills Capital Partners’ Steve Weiss. Elsewhere, Satori Fund’s Dan Niles told CNBC’s ” Squawk Box ” on Monday that he expects earnings season to show a slowdown across the technology sector, including the megacaps. “We plan on being either not in any of these names or hedged or short some of them going into earnings season,” Niles said. But despite these near-term concerns, the long-term optics appear glossy for these names, said Sylvia Jablonski, CEO at Defiance ETFs. Expectations for double-digit, compounded long-term growth and tailwinds from new developments like machine learning, AI and quantum computing overshadow most near-term troubles, she said. And, while valuations got cut in half last year, the path ahead appears intact. “It almost doesn’t matter what happens in the next year for these companies,” Jablonski said. “If anything, they’ll just have softer reads, and then sort of life goes on. I don’t think any of these companies are in any kind of significant danger.”
