Netflix And Fed Earnings Cast Clouds Over 2023's Tech-Stock Growth

There is a growing sense of concern among Wall Street analysts regarding the sustainability of the current surge in tech stocks this year. This concern was evident on Thursday, as the Nasdaq 100 Index, which is heavily influenced by technology companies, experienced its largest drop in five months. This decline was prompted by disappointing earnings reports from Netflix Inc. and Tesla Inc., which dampened the sector's outlook. Simultaneously, robust employment data raised worries that the Federal Reserve may not be as close to concluding its most aggressive monetary policy tightening in decades as previously anticipated.

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In the coming week, approximately 170 companies in the S&P 500 Index, representing 40% of its market capitalization, are scheduled to release their financial results. Among these companies are prominent tech bellwethers such as Microsoft Corp., Meta Platforms Inc., and Google parent Alphabet Inc. Additionally, on Wednesday, investors will closely scrutinize the Federal Reserve's announcement on interest rates, and Chair Jerome Powell's remarks will provide insights into whether their expectations of a quarter-point rate hike being the last were accurate.

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The primary concern for investors in the second half of this year revolves around the actions of the Federal Reserve. Eric Diton, President and Managing Director of Wealth Alliance, emphasized that any unexpected increases in interest rates beyond Wall Street's projections would adversely impact tech and growth stocks, calling for a reassessment of valuations.

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Growth stocks, particularly in the technology sector, are highly sensitive to interest rates as they influence the present value of future earnings. Despite this, tech stocks have surged this year, driven partly by excitement surrounding artificial intelligence breakthroughs, causing valuations to soar. For instance, the Nasdaq 100 has experienced a remarkable 42% increase this year and currently trades at 29 times forward earnings. Furthermore, the five largest tech firms in the S&P 500 index—Apple, Microsoft, Amazon.com Inc., Nvidia Corp., and Alphabet—are collectively trading at 30 times forward earnings, the highest since March 2022, nearly twice the multiple of the rest of the index.

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While some of these valuations reflect expectations of sustained earnings growth due to aggressive cost-cutting efforts by tech companies, concerns remain about the stock market's expectations being overly optimistic, drawing comparisons to the dot-com bubble era.

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Gina Martin Adams, Chief Equity Strategist sees potential for earnings pressures to ease for the top five S&P 500 companies in the second half of the year. This could lead to an improvement in profits and ultimately provide broader support to equity prices.

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For example, Microsoft, which is set to report earnings on July 25, has raised hopes that advancements in artificial intelligence will yield positive results, as it announced higher pricing of its corporate applications, exceeding investors' expectations.

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However, investors remain cautious due to the significant rise in tech stocks this year, fearing that market expectations may be overstretched. Some investors draw parallels with the dot-com bubble in the late 1990s, where exuberance over internet-related companies led to substantial losses for those caught up in the hype.

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Cheryl Smith, Portfolio Manager and Economist at Trillium Asset Management, urges prudence, highlighting the importance of careful analysis and evaluation of investment decisions, particularly when the market sentiment around tech stocks seems to be driven by "fear of missing out" (FOMO).

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