Tech Rally Continues Despite Earnings Warnings

Last week's earnings from high-profile technology companies were uninspiring at best and downright disastrous at worst. But that didn't stop traders from scooping up tech stocks ahead of more potential land mines.

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There is a growing sense of optimism in the stock market, as fear is dissipating. This is evident in the performance of many stocks, as well as in the overall market sentiment. This positive momentum is likely to continue, as more and more investors are becoming confident in the market.

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Despite concerns from some major companies and another expected interest rate hike from the Federal Reserve, the Nasdaq 100 Stock Index is having its best January since 1999. The Cboe Volatility Index, which measures market anxiety, has sunk to its lowest level in 10 months, signaling that investors are not too worried. And options trading on megacap stocks last week showed that there is not much demand for protection against a selloff. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in an interview on Bloomberg Television Friday that this is an investor-driven market where people want to see the glass as half full. They're looking past the bad news and hoping for better days ahead.

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Apple, Alphabet and Amazon are all set to report earnings on Thursday, after a week that saw some worrying results from other tech giants. Microsoft warned that sales growth from its Azure cloud-computing business is slowing, while Intel reported a drop in revenue of around one-third in the final quarter of 2022. IBM's earnings were also hit by weaker-than-expected profitability.

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Despite some poor showings, the Nasdaq 100 still managed to advance 4.7% on the week. This is nearly double the return of the broader S&P 500 Index.
According to Matt Maley, chief market strategist at Miller Tabak + Co., the current rally is being fueled by momentum and the fear of missing out. Investors are anticipating that a pause by the Fed will create the same kind of investment atmosphere that existed in 2020 and 2021.

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The Federal Reserve is expected to raise its benchmark interest rate by 25 basis points on Wednesday. Traders are betting that the central bank will soon ease financial conditions after raising rates at the fastest pace in decades to combat inflation. They believe that this will "be a panacea for everything," according to Shalett.
Wall Street analysts are cutting profit estimates for tech companies amid slowing revenue growth. The fourth quarter is projected to see the biggest profit decline since 2016. This is due to the waning demand for digital services and hardware that was seen at the onset of the Covid-19 pandemic.

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So far, most companies in the S&P 500 Information Technology sector are doing better than expected when it comes to profits. However, more and more companies are missing their revenue targets.

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Approximately 50% of the 22 companies that have reported thus far have surpassed revenue estimates, as per data compiled by Bloomberg. This is below the approximately 60% of the sector that topped revenue projections last quarter. After last year's Nasdaq 100 drop of 33%, tech stocks have been on the rebound this month. Although the index is still down 27% from its November 2021 record, the recent gains are a positive sign for the future.

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Many of the biggest gainers in the stock market so far this year have been companies that lost a lot of value last year. Tesla, Nvidia, and Netflix have all surged this month, up 44%, 39%, and 22%, respectively. These companies were among the biggest losers in 2020, with each one losing at least half of their value during the year.
Miller Tabak's Maley is skeptical that the rally can last if earnings disappointments keep piling up. He believes that if earnings continue to disappoint, the rally will eventually come to an end.

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"When the stock market reacts positively to a rash of negative news, it is a bullish sign," Maley said. "But in the end, the fundamentals still matter."