Earnings to Test Growth Shares After Rocky Start to Year | Investment news

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NEW YORK (Reuters) – A tough start to 2022 for US tech and growth stocks is upping the ante for upcoming earnings reports as investors seek reasons to maintain confidence in equities as they prepare for rate hikes. US interest.

The S&P 500 information technology sector, which accounts for nearly 29% of the weight of the broader index, is down 5.5% year to date, including sharp falls in stocks of heavyweights like Microsoft and Nvidia. both down by around 9%. The overall S&P 500 fell 2.7%.

Tech bulls hope a strong earnings season will ease some of the pain, which many attribute to rising Treasury yields and expectations that the Federal Reserve will tighten monetary policy and raise rates aggressively to fight inflation. .

As the Fed raises short-term rates, investors will be keeping an eye on rising US Treasury yields over the long term. Higher returns more strongly discount the value of future profits, which can put pressure on growth stocks especially.

“Given the performance of these tech names here recently, will the earnings save them?” said Walter Todd, chief investment officer of Greenwood Capital. “In the next month, seeing how some of these tech names respond to their numbers … will be interesting.”

The fourth quarter results season kicks off next week, with overall S&P 500 earnings expected to rise 23.1%, according to Refinitiv IBES. Earnings in the tech sector are expected to rise 15.6%, as other groups benefited more from the rebound of the economy from the pandemic blocs in 2020.

Companies in the S&P 500 growth index, which is full of tech stocks, are expected to increase earnings by 16%, compared to a 26% increase for the S&P 500 value index, which is more heavily weighted in banks, industrials and others. economically sensitive companies, according to Credit Suisse.

Higher interest rates could put pressure on stretched valuations of tech stocks, so companies must deliver impressive numbers in the coming weeks, said Kim Forrest, chief investment officer at Bokeh Capital Partners.

“In order for the (stock) price to go up even in a multiple rising / falling environment, you need to show demand for the product,” he said.

The technology sector is trading at around 27 times its earnings estimates for the next 12 months, close to its 18-year high, compared to 21 times the overall S&P 500, according to Refinitiv Datstream.

Netflix, whose shares plummeted more than 14% earlier this year, reports on Thursday the first results of the carefully monitored “FAANG” group of large growth companies. Investors will look at the streaming giant’s plans for content generation and its prospects for subscribers.

“If they can surprise the number of subscribers to the upside, I think it will be great for the share price,” said King Lip, chief strategist at Baker Avenue Asset Management, which owns Netflix shares.

Among the tech and growth names that struggled in January were Adobe and Salesforce.com, both down about 9%, and DocuSign, which was down about 15%.

The ARK Innovation ETF, which is full of growing stocks and was the best-performing US equity fund followed by Morningstar in 2020, is down more than 16% this year.

Yet not everyone is convinced that Treasury yields will rise much more, or that investors should move away from tech stocks as the Fed raises rates.

Goldman Sachs analysts see the 10-year Treasury yield rise to 2% by the end of the year, “suggesting only a further modest movement in long-term yields”, while “the likelihood of slowing economic growth in 2022 is an argument in favor of growth stocks “.

The 10-year Treasury bill yielded 1.76% on Friday, after hitting 1.8% earlier in the week.

A study by the Wells Fargo Investment Institute, meanwhile, found that the tech sector appreciated an average of 48.1% during five periods of rising interest rates since the 1990s.

The Wells Fargo Institute has a favorable rating on the technology sector, along with communications, industrial and financial services.

“This is all a very recent thing where people almost became convinced that the technology was rate sensitive,” said Sameer Samana, senior global market strategist at the Wells Fargo Institute.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio)

Copyright 2022 Thomson Reuters.

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