U.S. markets closed
  • S&P 500

    3,825.33
    +39.95 (+1.06%)
     
  • Dow 30

    31,097.26
    +321.83 (+1.05%)
     
  • Nasdaq

    11,127.84
    +99.11 (+0.90%)
     
  • Russell 2000

    1,727.76
    +19.77 (+1.16%)
     
  • Crude Oil

    108.46
    +2.70 (+2.55%)
     
  • Gold

    1,812.90
    +5.60 (+0.31%)
     
  • Silver

    19.77
    -0.51 (-2.50%)
     
  • EUR/USD

    1.0426
    -0.0057 (-0.54%)
     
  • 10-Yr Bond

    2.8890
    -0.0830 (-2.79%)
     
  • GBP/USD

    1.2103
    -0.0072 (-0.59%)
     
  • USD/JPY

    135.1750
    -0.5530 (-0.41%)
     
  • BTC-USD

    19,098.07
    -77.92 (-0.41%)
     
  • CMC Crypto 200

    420.84
    +0.70 (+0.17%)
     
  • FTSE 100

    7,168.65
    -0.63 (-0.01%)
     
  • Nikkei 225

    25,935.62
    -457.42 (-1.73%)
     

Breaking Down the Tech Sector's Earnings Outlook

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Technology stocks have been at the receiving end of the ongoing market reset in response to the Fed’s tightening policy. The ‘long duration’ nature of many Tech companies, with the bulk of their profitability way out in future years, left them vulnerable to rising interest rates.

You can see the effect of this development in the chart below that plots the year-to-date performance of the Zacks Technology sector (blue line: -24.1%) and the S&P 500 index (red line: -13.2%). The chart also shows the year-to-date performance of the Zacks Finance sector (orange line: -8.8%) and the Zacks Energy sector (green line: +38.4%).

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The pullback in the Tech sector has taken down valuations for the space to pre-Covid levels, as the chart below shows.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The chart shows that the Zacks Tech sector is currently trading at 20.9X forward 12-month EPS estimates, which is roughly -27% below where the sector traded at the start of the year and about where the sector was trading at the end of 2019.

The Tech Sector’s Earnings Outlook

We have discussed thus far how the sector’s stock price performance and valuation multiples have evolved during the ongoing market pullback. Let’s go into the sector’s earnings picture now.

The Zacks Tech sector is expected to earn -8.8% less earnings in 2022 Q2 compared to the year-earlier period on +2.7% higher revenues. This means that the sector will suffer another quarter of margin compression in Q2, after going through the same thing in 2022 Q1, when earnings were up +4.5% on +8.8% higher revenues.

But as you can see in the chart below, the sector’s earnings growth is currently expected to turn positive in the last quarter of the year.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

You can see this in the sector’s annual earnings picture as well, with earnings growth expected to rebound from next year onwards, after decelerating this year.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

We see a comparable growth trend for the ‘Big 5’ Tech players – Apple AAPL, Amazon AMZN, Alphabet GOOGL, Meta FB and Microsoft MSFT – as well.

Total Q2 earnings for the Big 5 are expected to decline -16.2% from the year-earlier level on +6.9% higher revenues. This would follow the -8.4% earnings decline on +11.4% revenue growth in 2022 Q1, as the chart below shows.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The ‘Big 5’ earnings growth is expected to resume next year, after declining this year, as the chart below shows.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Continued negative sentiment on the sector would imply that the market is very skeptical of these earnings expectations and thinks they are at risk of negative revisions. There has been some downward adjustment to Tech sector estimates for 2022 thus far, but they are very modest and nowhere near what has happened on the price front.

Keep in mind that the Tech sector is the biggest earnings contributor to the S&P 500 index, bringing in roughly a quarter of the index’s total earnings. As such, Tech earnings have broad implications.

The Overall Earnings Picture

Beyond the Tech sector, total Q2 earnings for the S&P 500 index are expected to be up +2.1% from the same period last year on +9.4% higher revenues. This is a significant deceleration from what we have been seeing in the preceding quarters, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

There is a rising degree of uncertainty about the outlook, being driven by a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening.

The Ukraine situation is exacerbating pre-existing supply-chain issues, which combined with its impact on oil prices, is weighing on the inflation situation in hard-to-predict ways. The evolving earnings revisions trend will reflect this macro backdrop.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Meta Platforms, Inc. (FB) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research