As earnings season picks up speed, optimistic investors are looking forward to robust corporate performances to halt the decline in technology stocks, which has dampened this year's US stock market surge. The technology sector of the S&P 500 has seen a nearly 6% drop in just over a week, losing around $900 billion in market value, as expectations of interest rate cuts and a potential second term for Donald Trump shift investment away from this year's top performers and into sectors that have underperformed in 2024. The S&P 500 has managed to fare slightly better, declining by 1.6% in the same period, with tech losses partially offset by significant gains in financials, industrials, and small caps. The index has still managed to rise by over 16% this year.
Second-quarter earnings could potentially bring tech stocks back into the limelight. Tesla and Alphabet, the parent company of Google, are set to report on Tuesday, marking the beginning of earnings reports from the 'Magnificent Seven' megacap stocks that have driven the market since early 2023. Microsoft and Apple are scheduled to report the following week. 'Big tech stocks have been at the forefront, and there's a valid reason for it,' noted Scott Wren, a senior global market strategist at Wells Fargo Investment Institute. 'They are profitable, they are increasing earnings, and they dominate their niches.'
Strong earnings from market leaders could alleviate some of the recent concerns surrounding megacap stocks, including overstretched valuations and unprecedented gains in stocks like Nvidia, which has surged by 145% this year despite a recent decline. Conversely, indications of weakening profits or lower-than-expected spending on artificial intelligence could challenge the narrative of tech dominance that has supported stocks this year. This could quickly become an issue for the broader market, as the 'Magnificent Seven' have contributed to around 60% of the S&P 500's gains this year.
Corporate earnings for market leaders are anticipated to meet high expectations. The tech sector is expected to see a 17% year-over-year increase in earnings, and the communication services sector, which includes Alphabet and Meta, is projected to rise by about 22%. These gains are expected to exceed the estimated 11% increase for the S&P 500 as a whole, according to LSEG IBES. Anthony Saglimbene, chief market strategist at Ameriprise Financial, suggests that many investors were surprised by an inflation report earlier this month that solidified expectations for a September rate cut by the Fed, leading to a shift into sectors that have struggled under tighter monetary policies.
The exodus from tech accelerated this week following a failed assassination attempt on Trump, which seemed to bolster his position in the presidential race. Additionally, semiconductor shares suffered after reports indicated that the United States was considering stricter export controls on advanced semiconductor technology to China. The Philadelphia SE semiconductor index has fallen by about 8% since last week. 'We are advising investors to use these pullbacks as an opportunity for long-term allocation,' said Saglimbene, who believes upcoming earnings reports could alleviate the selling pressure on Big Tech.
The broadening of gains into other market sectors has reassured some investors about the sustainability of this year's stock rally. During the recent shift, the ratio of gaining stocks to declining stocks over a five-day period reached its highest level since November, according to Ned Davis Research. Historically, when gainers outnumber decliners by at least 2.5 times, as seen in this recent period, the S&P 500 has averaged a 4.5% increase over the next three months, according to NDR. 'The risk is that mega-caps could drag the major indices lower, but history suggests that significant improvements in market breadth have been positive for stocks moving forward,' Ned Davis strategists stated in a recent report.
