Biggest Rally Since The Market Peak In November 2021 Just Ended In Tech Stocks

A five-day streak of gains for the Nasdaq just ended, with an increase of 3.3% over the last five days, which is a record high for the index. A week-long winning streak for the tech-heavy index is the longest since a streak that ended in November 2021 when the index's winning streak was at its longest. In fact, the Nasdaq is up 15% to start 2023 after suffering its worst year since 2008.

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It is fair to say that the last time tech stocks enjoyed a rally this long, investors were gearing up for Rivian's blockbuster IPO, the U.S. economy was closing out its strongest year for growth since 1984, and Nasdaq was trading at record levels.

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There seems to be a much smaller amount of champagne popping this time around. Wall Street has replaced growth as one of its top priorities on its checklist of things to consider, and tech executives are being rewarded for efficiency over innovation. There is no longer a market for initial public offerings. The number of layoffs is on the rise.

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Several of the world's most valuable tech companies announced their earnings reports this week, making it one of the biggest stories of the week. Despite this, the numbers, for the most part, were not in the best of shape.

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In its 25-year history as a public company, Amazon had its weakest year for growth in its history, as it missed estimates for the first time since 2016. Facebook parent Meta also experienced a third consecutive quarter of declining revenue.

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Despite the mixed reactions investors had to the individual reports, all four stocks closed the week with solid gains, as did Microsoft, which reported earnings the week prior and issued lackluster guidance in the form of only about 3% revenue growth this quarter.

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Cost control is king

In terms of performance, Meta was the best performer of the group this week, with the stock soaring 23%, its third best week ever. There was some good news in the earnings report provided by the company on Wednesday. Revenue came in slightly above estimates, despite sales declining year over year, and the forecast for the first quarter was fairly accurate.

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A key factor in setting off the rally was Facebook CEO Mark Zuckerberg's announcement in the earnings statement that 2023 would be the year of efficiency, and his note that they are committed to “becoming a stronger and more nimble organization.”

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“There can be no doubt that that was a game-changer,” Stephanie Link, chief investment strategist at Hightower Advisors, said in an interview with Trade Algo on Friday.

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“I think Meta really blew up this quarter because they finally got religion on cost-cutting, and that’s what made them really take off,” she said while discussing the quarter.

There is no doubt that the times are changing, and Zuckerberg has acknowledged this fact. Through the years of its IPO in 2012, the company grew between 22% and 58% a year from the time it went public until 2021. However, Refinitiv has predicted a 5% growth in revenue in 2023, while analysts are predicting a 1% decline in revenue in 2022.

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Zuckerberg told analysts on the earnings call that he didn't expect declines to continue, "but I also don't think it's going to go back to the way it was before." Meta announced in November that 11,000 jobs will be eliminated, or 13% of its workforce.

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As Link pointed out, Meta's stock got such a big bounce after its earnings because "expectations were so low and the valuation was so compelling." Meta's stock lost almost two-thirds of its value last year, far more than its peers in the mega-cap market.

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Navigating 'a Very Challenging Environment'

It is noteworthy that Apple, which fell 27% last year, gained 6.2% this week despite reporting its steepest drop in revenue in seven years. Tim Cook, the CEO of Apple, said results suffered as a result of a strong dollar, production issues in China affecting the iPhone 14 Pro and iPhone 14 Pro Max, as well as the overall macroeconomic environment. 

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It is clear that Apple is doing a pretty good job of navigating what is, of course, a very difficult environment quite well, according to Dan Flax, an analyst at Neuberger Berman, speaking to Trade Algo on Friday. "In the coming months and quarters, we will see a return to growth in the economy and the market will begin to discount this as we move forward. The name continues to appeal to us even in the face of these macro challenges that may be looming."

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Taking the unusual step of joining the earnings call with analysts on Thursday to explain his company's weaker-than-expected outlook for the first quarter, Amazon CEO Andy Jassy, who succeeded Jeff Bezos in mid-2021, joined the earnings call with analysts on Thursday. More than 18,000 jobs are expected to be lost at Amazon as a result of the layoffs that began in January.

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“Given that I have just finished my first full year in this position, and considering the unusual circumstances in the economy and our business over the last quarter, I thought this might be a good time to join,” Jassy explained on the conference call.

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There has been a growing emphasis on managing Amazon's expenses in the wake of the pandemic, a period during which the company expanded rapidly and later admitted that it had hired too many people during the time when the pandemic was at its peak.

"We are working hard to streamline our costs as much as we can," Jassy explained.

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There are also reports that Alphabet is in the process of downsizing. It was announced last month by the company that 12,000 jobs would be cut as a result of the restructuring. As a result of the pullback in ad spending at YouTube resulting in disappointing revenue for the fourth quarter, the company also suffered weakness in its cloud division as businesses tighten their belts as they tighten their belts as well.

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In an interview with Trade Algo, Ruth Porat, Alphabet's chief financial officer, said that the company is significantly slowing down its hiring process in order to achieve long-term profitability and growth.

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In spite of the fact that some of its gains were given up during Friday's sell-off, Alphabet shares ended the week up 5.4%. Since the beginning of the year, the stock has been up 19%.

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If the Nasdaq continues its upward trend and notch a sixth week of gains, it will equal the longest rally since January 2020, just before the Covid pandemic struck the U.S., when the Nasdaq reached its previous record.

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The focus will now shift from large companies' earnings reports to smaller companies' earnings reports. Pinterest, Robinhood, Affirm, and Cloudflare are some of the names they'll be hearing from next week.

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It was not only the tech sector that prospered this week, but also the semiconductor industry. There was not a lot of growth for Wall Street to be excited about, as it was the same as with consumer tech companies.

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In its quarterly earnings announcement on Tuesday, AMD beat on sales and profits, but guided analysts to a 10% decline in revenue year-over-year. During the last week, Intel, AMD's primary competitor, reported a disaster of a quarter and forecast a 40% decline in sales in the March quarter due to a sluggish economy.

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While AMD's stock rose 14% for the week, Intel's stock rose almost 8% as well. There were also some nice gains made by Texas Instruments and Nvidia.

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PC and server makers are dealing with a glut of extra parts and falling prices for components such as memory and central processing units, which are putting pressure on the semiconductor industry. Despite the horrible year 2022, the stocks are rebounding on indications that an easing of the Federal Reserve rate increases and a lowering of inflation numbers in the latter half of this year will boost the stocks in the near future.