Megacap tech earnings in Q2 have investors looking past the Fed decision

This is one of the biggest weeks of the year for technology company earnings, to the point that the Federal Reserve’s interest-rate decision could be something of an afterthought.

While higher rates have been the primary headwind to tech stocks this year, investors say the policy path is now priced in, especially since consumer inflation expectations are falling, suggesting the Fed may be able to be less hawkish. 

And two titans of the tech industry are giving investors cause for optimism: Microsoft late Tuesday gave an encouraging sales forecast, while Google parent Alphabet reported resilient ad revenue. Futures contracts on the tech-heavy Nasdaq 100 Index rose 1.4 per cent in premarket trading.

“The market is comfortable with the path of hikes, and if rates are stabilizing here, that should be a good backdrop for growth stocks to come back again,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, who has been taking profits on energy stocks and rotating into tech, while also telling clients to add to the sector. 

Because the Fed is a known quantity, Janasiewicz added, earnings will be critical for the market. He is focused on how margins are holding up amid inflation, and on how much consensus estimates may need to fall.

The Nasdaq 100 has risen 8.6 per cent from its June low, and recently broke above its 50-day moving average for the first time since April, a positive signal for near-term momentum. It is on track for its biggest one-month percentage gain since October but remains down about 26 per cent this year. The yield on the 10-year Treasury is below 2.8 per cent, down from a June peak of almost 3.5 per cent. 

The Fed’s meeting came in a busy week for earnings. Apple, Amazon.com, and Facebook parent Meta Platforms are all scheduled to report this week. 

So far this earnings season, about 78 per cent of technology companies in the Nasdaq 100 have reported better-than-expected earnings and revenue, according to data compiled by Bloomberg.

Of course, the macroeconomic backdrop remains a key factor behind earnings and corporate outlooks. Matt Calkins, the chief executive officer of enterprise software company Appian, is so concerned about inflation that he wants the Fed to be extremely aggressive, raising rates by 100 or 125 basis points.

“We need to either get inflation back in the box, down to 2 per cent again, or we will need to end up with some kind of long-term acceptance of higher inflation,” he said in a phone interview. A recession is inevitable, he said, and “the main issue is whether we will still have inflation on the other end.”

Some investors are also concerned that earnings estimates and stock prices don’t yet reflect the full effect of a slowing economy triggered by higher rates. The Nasdaq 100 is trading at 20.4 times forward earnings, slightly above its 10-year average.  However, if consensus estimates continue moving lower, as they are expected to, that multiple might be deceptively low.

Stocks rise: Google UP 5%, Alphabet 6% in intraday trade

• Google parent Alphabet reported second-quarter revenue that met analysts’ expectations, reflecting the internet giant’s resilience amid slowing growth in advertising. Shares rose over 4.3% in intraday trade
• Microsoft gave an upbeat sales forecast for the fiscal year that just began, easing investor concerns about growth that had flared up following a lackluster fourth-quarter earnings report. Shares climbed 5.4% in intraday trade
• Texas Instruments, the maker of chips used in everything from washing machines to satellites, gave a bullish forecast for the current period, countering concern that a slowing economy is hurting demand for electronics