Apple and Amazon Results Pose Tech Rally’s Toughest Hurdle Yet

2023-08-03 17:59

Results from Apple Inc. and Amazon.com Inc. after Thursday’s close represent the next big hurdle for the market’s

Apple and Amazon Results Pose Tech Rally’s Toughest Hurdle Yet

Results from Apple Inc. and Amazon.com Inc. after Thursday’s close represent the next big hurdle for the market’s tech-fueled rally, and it may be the hardest to clear.

Both stocks have been critical to the S&P 500’s advance this year, attracting investors with their relatively durable revenue streams and market dominance. But whether they can fuel further gains is in question, given they trade at lofty multiples, face headwinds in their core businesses, and have limited direct exposure to artificial intelligence — a key driver behind this year’s jump.

“At these valuations, multiples either need to come down, or earnings need to rebound in a very robust way, which might be difficult since a lot of AI excitement has been priced in,” said Irene Tunkel, chief US equity strategist at BCA Research. “But that remains a buzzword more than something that is moving the needle in terms of growth.”

Rate sensitive tech stocks suffered a blow on Wednesday after Treasury yields soared in the wake of Fitch’s downgrade of US sovereign debt. A tech-fueled rally has added more than $6 trillion in value to the S&P 500 index this year, but the sector has struggled to advance after coming within 5% of the Nasdaq 100’s all-time high last month, despite better-than-expected reports from Alphabet Inc. and Meta Platforms Inc.

Apple, whose 48% gain in 2023 has made it the only company valued at more than $3 trillion, will be especially critical if the rally is to get back on track. The stock accounts for nearly 8% of the S&P 500 Index, giving it enormous sway over the benchmark.

The iPhone maker is expected to report a 1.7% drop in revenue in its fiscal third quarter, which would be its third consecutive year-over-year contraction. It is also facing a risk from a weak smartphone market in China, one of its biggest markets, while a tepid revenue forecast from Qualcomm Inc. on Wednesday underlined weak demand for mobile devices. However, Apple trades at nearly 30 times estimated earnings, above its long-term average and at a premium to the market overall.

“Apple seems like a stable story, rather than one that will sprint ahead in growth, and I don’t know what it can do to jazz investors further given the run its had,” said David Klink, senior equity analyst at Huntington Private Bank. “It looks expensive, and presumably everyone who wants to own it already does, so you really have to wonder what it could do to get a pop.”

After rising 53% in 2023, Amazon trades at about 40 times estimated earnings. While this is below its long-term average, a key driver of the company’s profitability comes from its Amazon Web Services cloud business. In a potential warning sign, Microsoft Corp. last week warned of a continued slowdown in its cloud-computing business.

“The results from Microsoft were decent, but even decent results won’t be well received with Amazon,” said Klink. “It is still the market leader in cloud, and if it also shows things slowing, then investors probably got ahead of themselves.”

Tech Chart of the Day

The CBOE’s Nasdaq-100 volatility index gained 12.5% on Wednesday, its biggest one-day percentage gain in nearly a year. The spike in volatility came as the Nasdaq 100 sank 2.2% in a broad decline.