Amazon and Apple Results Pose the Toughest Hurdle for Tech Rally

The upcoming earnings reports from Apple Inc. and Amazon.com Inc. after Thursday's closing bell are significant challenges for the market's tech-driven rally, and they might prove to be the most difficult hurdles to overcome.

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These two stocks have played a crucial role in the S&P 500's growth this year, attracting investors with their strong revenue streams and market dominance. However, doubts have arisen regarding their ability to fuel further gains due to their high valuations, headwinds in their core businesses, and limited direct exposure to artificial intelligence (AI), which has been a major driver behind this year's market surge.

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Irene Tunkel, Chief US Equity Strategist at BCA Research, expressed concerns about the high valuations and the need for either earnings to rebound significantly or multiples to come down. The excitement around AI, though a buzzword, might not be contributing as much to growth as anticipated.

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On Thursday, Apple shares declined by 0.3%, while Amazon dropped by 0.9%. The tech sector, which has been driving the rally, faced headwinds as Treasury yields surged following Fitch's downgrade of US sovereign debt. Despite solid reports from Alphabet Inc. and Meta Platforms Inc., the sector struggled to advance after approaching the Nasdaq 100's all-time high last month.

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Apple, the only company valued at over $3 trillion, holds significant weight in the S&P 500 Index, accounting for nearly 8% of the benchmark. To revive the rally, Apple's performance is crucial. However, it is expected to report a 1.7% drop in revenue in its fiscal third quarter, marking the third consecutive year-over-year contraction. The weak smartphone market in China, one of its major markets, adds to the risks. Despite these challenges, Apple's valuation is nearly 30 times estimated earnings, above its long-term average and at a premium compared to the overall market.

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Amazon, which saw a 51% rise in 2023, trades at around 40 times estimated earnings, slightly below its long-term average. However, a significant portion of its profitability comes from Amazon Web Services, its cloud business. Recent warnings from Microsoft Corp. about a slowdown in its cloud-computing business have raised concerns about Amazon's performance.

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The CBOE's Nasdaq-100 volatility index experienced a significant gain of 12.5% on Wednesday, the largest one-day percentage increase in almost a year. This spike in volatility was accompanied by a 2.2% decline in the Nasdaq 100 due to a broad market decline.

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