Tech stocks hope for good earnings to power Nasdaq 100 higher
Tech stocks have struggled since mid-July, but earnings season may deliver a reason for the sector and the Nasdaq 100 to embark on a Q4 rally.
Tech stocks struggle as yields rise
Big tech stocks, including Apple, Microsoft, Amazon.com, Alphabet, Nvidia, Tesla, and Meta, have experienced a 7% drop over the past two months, compared to a 3% decline in the broader S&P 500. This decline can be attributed to the rise in Treasury yields, which have reached 16-year highs, causing investors to reevaluate their positions.
Big tech names see valuations fall
As a result of these declines, mega-cap forward price-to-earnings (P/E) ratios have fallen by 20% over the past two months, leading to their cheapest levels in six years. This has created a significant discount compared to the market based on long-term growth, a situation not seen since January 2017. However, despite these valuation declines, Goldman Sachs notes that the group is expected to post sales growth of 11% in the third quarter (Q3), far outpacing the 1% improvement expected for the S&P 500 as a whole.
Sector’s strong historical record
The sector has a strong record of outperformance when it comes to earnings. They have beaten consensus sales growth expectations 81% of the time and have outperformed in two-thirds of earnings seasons since the Q4 of 2016.
Q4 seasonality effect remains strong
Tech stocks have suffered sharp declines since August. The percentage of members of the Nasdaq 100 above their 50-day simple moving (SMA) average fell to 12% in early-October, its lowest reading in a year.
Historically, this low breadth reading tends to be followed up by a surge in the stock prices of big-cap tech stocks, and in the price of the Nasdaq 100 itself. In addition, seasonality for the sector remains positive, with the final quarter of the year seeing a positive performance for tech stocks over the past 20 years.
Concerns about the global economy remain, but with interest rates in the US appearing to have plateaued, a brighter outlook for mega-cap tech names appears to have arrived.
Nasdaq 100 technical analysis
After a huge run higher in the first half of the year, which saw the index gain 43% by mid-July, we have seen the Nasdaq 100 drop back.
Trendline resistance from the July high has prevented any near-term breakout for the index, but the 14,500 level has been staunchly defended in August and September.
A breakout above 15,370 would mark a more bullish view, and align with expectations of positive performance for the index as normally seen in the final quarter of 2023.
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