Traders Face Up to Reality as Nasdaq 100 Profit Forecasts Drop

(Bloomberg) -- Tech bulls are grappling with a new reality: breakneck profit growth is no longer something they can count on.

Analysts are becoming more glum on tech earnings as weaker-than-expected results and guidance from the likes of Amazon.com Inc. and Apple Inc., along with a new era of rising interest rates, cast doubt on what has been the market's most long-standing growth narrative.

Big tech shares were modestly lower on Tuesday. Apple fell 0.2%, Microsoft lost 0.4%, Alphabet declined 0.2%, and Amazon slid 0.7%. Meta Platforms fell 0.7%.

Analyst estimates for 12-month forward earnings-per-share for stocks on the Nasdaq 100 Index fell about 0.2% last week on aggregate. That was the first drop in weekly estimates since December. The same measure for S&P 500 company earnings, meanwhile, rose about 0.1%, according to data compiled by Bloomberg.

Recent quarterly results represent the “end of euphoria” for tech, Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, said in a May 1 report, with the sector's weakness among the most notable trends of the quarter.

Numerous factors have been weighing on tech sentiment this year, including fears of an economic slowdown, the impact of surging inflation on consumer demand and -- perhaps most crucially -- the start of what is expected to be a series of Federal Reserve rate hikes. Fed officials meeting this week are widely expected to deliver a 50 basis-point increase, with higher rates especially negative for tech stocks valued on future growth expectations.

READ: Investors See $1.8 Trillion Value Vanish in a Month: Tech Watch

Less-than-stellar results from some of the Nasdaq 100's biggest companies have also hurt. Last week, Amazon plunged in a historic rout amid slowing e-commerce growth and disappointing forecasts, while shares in Apple also dropped after the iPhone maker warned that supply constraints would hurt sales by billions of dollars. Alphabet Inc. also released first-quarter revenue that fell short of analysts' expectations.

And analysts aren't just cutting profit expectations. They're also lowering their price targets for tech stocks. The Nasdaq 100's 12-month price target -- calculated by aggregating the average targets of its constituents -- fell by 2.3% last week, the biggest weekly drop since late 2008. It was also the 10th straight week of declines for that measure, something that hasn't happened since U.S. stocks tumbled to close out 2018.

“Tech and other growth stocks are facing a double whammy, with earnings growth that's underwhelming and valuation compression that's overwhelming,” said Mona Mahajan, senior investment strategist at Edward Jones.

Still, with the Nasdaq 100 already down 20% year-to-date, she remains positive on tech in the longer term.

“We think a large part of the correction has now occurred, and valuations have become more interesting,” she said in a phone interview. “As we look out 12 months, we expect that either economic growth will be slowing, or that inflation will be. In either scenario, tech should be back in favor.”

Tech Chart of the Day

This year's tech rout means that the Dow Jones Industrial Average is enjoying a rare stretch of outperformance. While the blue-chip gauge is down 9% in 2022, that's far milder than the 20% retreat seen by the Nasdaq 100. The Dow's outperformance is due to the fact that it doesn't include Amazon, Alphabet, Meta Platforms Inc. or Netflix Inc. -- which are all down at least 20% this year -- among its components.

Its price-weighted structure also limits Apple's influence on the benchmark. Tech has a 21% weighting in the Dow, while communication services -- the sector Alphabet and Meta are classified under -- is just 3.2%. Meanwhile, tech is more than 50% of the Nasdaq 100, followed by a nearly 17% weighting for communication services.

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