(Bloomberg Opinion) — This year’s 20% rally in U.S. tech stocks is becoming decoupled from reality ahead of what is expected to be a season of grim reporting, the latest MLIV Pulse survey shows.
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While investors flocked to the technology in the market shakeup amid the recent banking turmoil, the churn is at odds with analysts calling for the steepest drop in quarterly earnings for the sector since at least 2006. Almost 60% of the 367 polled by Bloomberg said the rebound in stocks had nothing to do with earnings expectations.
Profits at big banks, on the other hand, have probably been hit by the tumult in the industry, according to 41% of respondents.
“Technology outperformance is a bit of a stretch and we are not going after it indiscriminately,” Wei Li, global chief investment strategist at BlackRock Inc., said in an interview in London. “He’s being driven by expectations that the Federal Reserve will start cutting rates as a recession becomes apparent, and not necessarily by company fundamentals.”
The fallout from the Silicon Valley Bank collapse has prompted mixed narratives about where policy and markets are headed. While concerns about a recession are growing, they are also fueling optimism that the Fed will be forced to pause its rate-raising campaign, even as the central bank grapples with sticky inflation.
Reporting season is the next big catalyst for investors who have been glued to economic data and Fedspeak for market signals. Earnings will drag the S&P 500 lower, 60% of respondents said, while data compiled by Bloomberg Intelligence shows analysts estimate an 8% drop in earnings for its members in the first quarter.
“More broadly, the impact of inflation and higher costs still have room to hit profit margins, and that will come this season,” BlackRock’s Li said.
crucial technology
The technology report card will be crucial for the broader market, as the S&P 500’s 7% gain in the first quarter has been driven mainly by a handful of industry giants. Analysts estimate US tech profits fell 15% in the three months to March, with companies hit by high costs and slowing demand.
Early omens do not bode well, with widespread layoffs in the industry signaling a slowdown. Shares of Tesla Inc., which trades more like a growth or technology stock, fell this month after the electric carmaker’s meager gains in vehicle deliveries in the latest quarter disappointed investors.
About a fifth of S&P 500 companies have issued guidance on first-quarter results in recent weeks, with three negative forecasts for every one positive, according to Aneeka Gupta, a director at Wisdomtree UK Ltd.
Tech stocks also look expensive. The Nasdaq 100 is trading at 24 times its future earnings, well above its long-term average of 19 and the S&P 500’s multiple of 18, according to data compiled by Bloomberg.
More than a quarter of respondents to the Bloomberg survey expect the gains to halt the tech rally. Only 14% predict higher gains.
bank turmoil
Where technology has gained favor, banks have lost it. A key focus for investors in earnings season will be any impact from the recent collapse of some regional US lenders.
Some 41% of those surveyed by MLIV Pulse expect the turmoil to hit profitability at the biggest banks, while 31% see no spillover effect.
JPMorgan Chase & Co. and Citigroup Inc. will provide a first look when they report results on April 14. Analysts still project a 4.2% earnings rise for US financials in the first quarter, data compiled by Bloomberg Intelligence shows.
“Given what we know now, and the fact that the recent banking problems were caused by liquidity problems, not credit problems, we don’t expect broader consequences affecting the largest banks,” said Ron Saba, a senior manager. portfolio of Horizon Investments.
The biggest negative factor this season will be a further tightening of financial conditions, according to a third of those surveyed by MLIV Pulse. An economic slowdown and high inflation are seen as the next biggest risks.
While some recent data shows an easing of price pressures, market strategists including Morgan Stanley’s Michael Wilson have warned that profit margin expectations remain too high.
Overall, around 56% of participants expect US Treasuries to outperform stocks over the next month.
“The upcoming earnings season has the potential to send chills among investors as high prices, an increasingly likely recession and difficulty accessing capital amid the banking sector meltdown will weigh heavily on the market,” said Greg Bassuk, CEO of AXS Investments.
Of those surveyed in the latest survey, 65% were professional investors and 35% retail.
MLIV Pulse is a weekly poll of readers of the Bloomberg Professional service and website, conducted by Bloomberg’s Markets Live team, who also run a 24/7 MLIV blog on the terminal. To subscribe to MLIV Pulse stories, click here.
–With the assistance of Alicia Diaz and Sungwoo Park.
(Update with a video).
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