Interactive Investor

US results season: are tech stocks still hot to trot?

21st April 2021 12:59

Richard Hunter from interactive investor

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Our head of markets shares his view on the US tech sector as earnings season approaches its peak.

The quarterly reporting season in the US is about to move into full throttle with a particularly intense set of company reports next week.

Adding further colour to the nascent economic recovery, most bases will be covered by the sheer variety of companies providing updates.

From Boeing (NYSE:BA) to General Electric (NYSE:GE) to Starbucks (NASDAQ:SBUX), and from Ford (NYSE:F) to Caterpillar (NYSE:CAT) to McDonald's (NYSE:MCD), there will be confirmation on the ground as to how companies have fared most recently.

Equally importantly, after the boost of vaccine breakthroughs in November, the outlook comments from these companies will be important in establishing how the economic cycle is now developing.

There is also a swathe of technology companies who are due to provide updates, and this could be of particular interest.

It is increasingly accepted that the pandemic has accelerated the use of technology by individuals by anything from three to five years. This is especially true of a new generation of “silver surfers” for whom the transition to the likes of FaceTime and Zoom has been easier than expected.

At the same time, a raft of new offices has sprung up globally, previously known as homes. This resulted in technology upgrades to the new home offices, an explosion in goods and indeed food being ordered online, with workers moving on to streaming services for the evening.

Tech shares went on a tear during 2020 as a result.

Of course, with higher valuations come higher expectations, so the pressure will be on companies to repeat the strong numbers already reported by the banks.

More broadly, analysts surveyed by FactSet project that earnings for the S&P 500 will grow by over 30% in this first quarter, double the previous rate of growth which they had been expecting when last asked in late December.

In investment terms, the last few months have proved a tricky time for big tech, as investors have bagged some profits and chosen the rotation trade, switching into cyclical stocks which should benefit from a full recovery, ranging from banks to oils and from housing to manufacturing.

At the same time, investors are debating how much of the shift in behaviour arising from enforced lockdowns will translate into the post-pandemic world.

We have already seen that Netflix was given short shrift by the market after subscriber growth fell way short of expectations.

Competition from the likes of Disney+ has eaten into the company’s market share, although Netflix (NASDAQ:NFLX) highlighted that a lower content slate in the quarter was the main culprit, as the pandemic crimped the production of new shows. Even though that should reverse in the second half of the year, it begs an important question.

Will viewing habits revert to the norm in a post-pandemic environment? The next few months could yet define the new landscape for streaming services such as Netflix and in turn place questions over its valuation. 

For the Nasdaq index itself, perhaps the pause for breath is unsurprising. At the time of writing, the index is still ahead by 7% in the year to date, following gains of 44% last year and 35% in 2019.

In addition, due to the strength of earnings growth this time last year as the lockdowns became entrenched, comparison numbers are going to be tough to emulate.

Further out, there may even be an extension to the debate of what actually constitutes a “tech” share. Needless to say, the vast majority of companies in the developed world now rely on and use technology in one way or another. However, Amazon (NASDAQ:AMZN) is a case in point.

Is it a retailer turned tech giant or maybe even the other way round? Although mostly seen as a bellwether of big tech, for some in the US it actually falls into the consumer discretionary sector, despite its now being a major player in the cloud computing space.

That is a question for another day, however.

For the moment, tech shares have a point to prove and high expectations to meet.

We will be closely following those updates over the next few trading sessions, as we hear from Tesla (NASDAQ:TSLA), Twitter (NYSE:TWTR), Google owner Alphabet (NASDAQ:GOOGL), Amazon, Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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