A lot of worries have been centered on the tech sector. While many are upset about the losses currently being felt, and even bigger fear is that tech might drag down the whole market. Well, Goldman Sachs says investors shouldn’t be too worried about that. The reason why is that while tech makes up a large part of the market’s current capitalization, earnings growth forecasts are much more broad-based, which will limit the fallout to the market as a whole. Goldman summarized their view this way, saying “From a fundamental perspective, narrow market leadership typically reflects narrow earnings strength, which is often a symptom of a weakening operating environment … Unlike past episodes of narrow market breadth, the earnings environment today appears healthy and broad-based”.
FINSUM: Goldman points out what should be a nice buffer, but we are more worried about the emotional, rather than rational, reaction of investors to falls in tech. That said, broad-based earnings strength is a good support.
Apple’s earnings are always a big deal, but it is hard to remember a time where they were more important than right now. The tech sector, include the FAANGS, of which Apple is a member, have been getting routed. The Nasdaq has fallen strongly as a result of this, but the Dow, of which Apple is the only FAANG member, has held up reasonably well. The market is getting increasingly anxious about how tech stocks might affect the whole market, and how the sector performs seems like it is being taken as a bellwether for the economy. Thus, all now hinges on Apple.
FINSUM: If Apple puts in good earnings, then the market might stay strong and consider tech’s issues isolated. If Apple’s earnings are poor, it could lead to a broad selloff.
With tech falling so strongly in recent days, a sense of panic is spreading across the media and markets, and it is all centered around one question—will the trouble in tech bring down the whole market? Tech accounts for a major part of the total capitalization of the market, and thus its ability to bring down stocks as a whole is strong. This seemed to be evidenced yesterday, as big falls in Netflix and Twitter conspired to bring all major indexes down significantly, though the Nasdaq fell the most. Now all eyes will turn to Apple, the only FAANG stock in the Dow, as it releases earnings.
FINSUM: Tech has accounted for so much of the price expansion and earnings growth of the market that it has an importance that extends even beyond these. Thus, we think a lot of investor sentiment about the whole market hinges on the performance of tech.
Last week’s nosedive in Facebook shares was nothing short of historic. Twitter followed close on its heels. The big question for investors is whether these flops signal anything about the greater market, or were they just idiosyncratic falls? The answer is that they may. Stocks are very concentrated at the moment, with a small group of tech stocks—the FAANGS—driving the gains. Therefore, losses in that group could drive down the whole market, and even be seen as a bellwether. Today’s concentration is roughly on par with 1999, but differently, all the leaders are in the same sector—tech, making the market more vulnerable. Because tech companies are also the engine for growth, their predicted expansions make up an even larger share of forecasted earnings growth than their current market capitalization.
FINSUM: We see the point of this argument, but we do want to point out one important caveat: the word “tech” itself. We use that term very liberally today. While it is easy to say the concentration is dangerous because all the constituents are “tech”, Amazon, Apple, Facebook, and Netflix are all very different businesses, so perhaps not as intercorrelated as “tech” would indicate.
Yesterday was an absolutely monstrous one to be an investor in Facebook. In what will likely go down as a history-making day for the company, Facebook shares dropped a whopping 20% yesterday, equating to more than $100 bn of value lost. The huge losses were sparked by weaker than expected revenue growth as well as flat or falling user bases. That sent the stock down 7%. However, it was the guidance provided on a conference call that really spelled doom. The company’s CFO said that he expected weak revenue growth to continue, while costs were expected to rise 50-60% this year.
FINSUM: The big rise in costs is coming because Facebook is hiring 20,000 staff to increase cybersecurity. The need to do so does not bode well for the stock or the tech sector generally.