The Drop In Tech Earnings, A Major Test For The Stock Market

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    Heavyweight of the American Stock Exchange, the technology sector is preparing to publish results down more than 10% in the first quarter, according to the consensus of financial analysts. This would be the first decline in profits in the sector since 2016, even as the tech stocks have posted the largest rises on Wall Street since the beginning of the year.

    The strong market valuation of the sector makes it vulnerable to corrections, as illustrated by the plunge of more than 20% in the fourth quarter of 2018. Since this big fear, stocks have almost returned to their historic highs (+20% for tech heavy Nasdaq), amid hopes of trade agreement between the United States and China and the Fed in favor of more accommodating monetary policy. The next few weeks will say if the forecasts for the rest of the year will be enough to support the increase, or if the time for a new correction has arrived.

    It is IBM, the world leader in computer services, and Netflix, the world’s number one streaming video, kicking off tech earnings season on Tuesday, after the market close. They will be followed in the coming weeks by other big names of the sector.

    According to the consensus reached by Factset (Dow Jones Group), on April 12th, the profits of the Information Technology sector within the S & P 500 are expected to fall by 10%, 6% in the first quarter compared to the same period of 2018. A decline well above that of 4.3% expected for the entire S & P 500 (their first decline since 2016!) The tech names of the S & P 500 may post the third largest decline in earnings in Q1 after energy (-22.9%) and commodities (-11.7%), according to the financial data firm.

    Revenues for tech companies are expected to fall 1% against a rise of 4.8% forecast for the S & P 500. The new sector of communication services of the S & P 500, which now includes telecom operators, but also Facebook, Alphabet Netflix, the media and video games, is better off, with a profit forecast down 2.1% but with expected revenue increase of 13.1%.

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    I cover technology, utilities and biotechnology for Markets Morning, and I help out occasionally with other industry sectors. I've written about investment and personal finance topics for more than 20 years from a lowly copywriter to editor-in-chief, so I've done a little bit of everything. For what it's worth, I have a BA from Duke University and an MBA from Rollins College. I'm married with one daughter, and that's worth more than everything else put together.

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