Microsoft will “open” the business report season of the technology industry, the results are forecast to be the worst since 2016

The outlook is less optimistic

Nasdaq, an index consisting mostly of technology companies, is facing a gloomy outlook next week as US technology companies simultaneously release business results. Emphasizing the risks ahead, Microsoft, which will officially kick off this quarter’s earnings season on January 24, has also begun cutting staff.

Before that, Amazon.com also laid off thousands of people when sales slowed. Google’s parent company Alphabet is also pursuing its own downsizing plan.

Over the past several months, Wall Street has continuously slashed earnings estimates for technology businesses. The unsatisfactory business situation of these businesses is also considered the biggest obstacle to the performance of the S&P 500 in the fourth quarter. However, the danger for investors lies in the fact that experts remain too optimistic, even as demand falls and economic growth cools.

After Microsoft, a series of other technology businesses will report business results next week. Apple Inc., Alphabet and other giants will announce the following week. The business results of this group are forecast to drastically change the S&P 500 index when accounting for ¼ of the total market capitalization.

Tech companies’ quarterly earnings are expected to fall 9.2 percent year-on-year, the worst slide since 2016. However, the pace of decline in investor sentiment, according to Bloomberg. also worth noting. Three months ago, Wall Street still believed that tech businesses could move sideways in the fourth quarter of 2022.

Tech companies’ revenue growth is also slowing from a few years ago, as the prolonged pandemic and lockdowns led to a boom in demand for everything from digital services to computers. personalities and components for them. Meanwhile, costs are now being inflated, cutting deeper into profits.

Concerns from valuation

Still, that’s not the worst. Worryingly, the valuations of tech businesses are “far from cheap” even as Nasdaq fell 33% last year. Currently, Nasdaq’s P/E remains at 21, well above the 20.5% average maintained throughout the past decade. The drop in earnings estimates makes the P/E look even more expensive.

However, Sameer Bhasin at Value Point Capital assesses that most of the bad news has already been reflected in the price. He predicted first-quarter profits for tech businesses could fall further but some concerns were overblown.

“The problem with technology is not the industry’s need, but the process of digesting what has accumulated during the pandemic. There’s clearly money waiting to come back into the sector,” Bhasin said.

Analysts expect tech industry profits to rebound in the second half of the year. That makes investors more interested in the prospects of these businesses in the year. However, the fourth-quarter earnings season also needs to be closely watched.

Reference: Bloomberg