Big-tech stocks lose US$400b — and they’re still expensive

This week’s $370 billion big tech selloff amid a broader rally in the market did nothing to change the view that the stocks are still too expensive.

No big-name Wall Street types are out there declaring them cheap, and investors have actually come to see them as more dangerous rather than more attractive after the rout, irrespective of Friday’s rebound.

As the week went on and the ugly earnings reports piled up, investors frantically scooped up put options that protect themselves from further losses.

Yes, the likes of Alphabet Inc., Inc. and Microsoft Corp. are less expensive after the selloff, but they are far from obvious bargains. Part of the problem, says Mark Haefele, the chief investment officer at UBS Global Wealth Management, is that analysts now need to mark down their earnings estimates for these companies to reflect the weakening economic fundamentals highlighted in the third-quarter reports. And as those estimates come down, the stocks’ valuations based on projected profits will bounce right back up.

“Earnings estimates for tech look too high given elevated US inflation, declining corporate confidence and a tightening of financial conditions,” Haefele said.

The Week That Was

One after another, tech giants delivered a roughly similar message this week: Sales are slowing from personal computers to digital advertising and e-commerce amid soaring interest rates and rampant inflation. Even growth in cloud computing, regarded as something close to recession-proof because the services can help businesses save money, is decelerating.

The response from traders was to head for exits in droves, inflicting more pain on a critical group of stocks that over the course of the year have gone from perennial market leaders to pariahs and laying down another roadblock to a sustainable market rebound.

Options trading in big tech stocks suggest that investors are back on the cautious side or even speculating that there’s more room to fall. The aggregated put volume for Apple Inc., Meta Platforms Inc., Netflix Inc., Amazon, Alphabet and Microsoft has spiked from a low and is now back at levels last seen in May, according to data compiled by Bloomberg.

Microsoft and Alphabet lost about $280 billion in combined market value on Wednesday, the day after delivering results. Meta Platforms shed a quarter of its value after plans to boost spending jolted investors amid its second-consecutive quarter of shrinking revenue. Meanwhile, Amazon’s worst forecast for holiday-quarter growth in its history sent the stock down as much as 12% on Friday, briefly pushing its market capitalizaton below $1 trillion.

Apple’s Resilience

It wasn’t until Apple, the last of the five biggest technology companies by sales to report, that investors were treated to some good news. The iPhone maker’s quarterly revenue exceeded Wall Street estimates thanks to brisk sales of Mac computers and wearables like watches. However, Apple warned that growth wouldn’t be as good in the current quarter.

Apple’s relative strength in the wake of the other ugly earnings reports generated relief and sent the stock to a 7.6% gain on Friday, helping to lift the Nasdaq 100 Index and the S&P 500 while adding about $150 billion to its market value.

Market Influence

Microsoft, Amazon and Alphabet have all seen their shares fall more than 30% this year, compared with a roughly 18% decline for the S&P 500. Apple, the only of the megacaps whose shares are living up to the notion that big tech’s massive scale and dominant market positions would insulate them from a market downturn, has fallen 12%.

Big tech’s fall from grace has eroded its influence over the market-capitalization weighted S&P 500 Index this year to the lowest since April 2020. Still, at 19% of the benchmark, Apple, Microsoft, Alphabet, Amazon and Meta Platforms hold bigger sway than the utilities, energy and consumer sectors combined.

So far this week the carnage has done little to dampen enthusiasm on Wall Street this week amid optimism that the Federal Reserve is nearing a pause in its rate-hiking campaign with the economy weakening. The S&P 500 rallied for a second-consecutive week with a 4% advance.

Still, a gauge of the four original FANG stocks — Meta Platforms, Amazon, Netflix and Alphabet — is on track for its worst week ever relative to the S&P 500 Index.

Megacap tech stocks, the go-to place for investors to hide out during the pandemic, have been among the market’s biggest losers this year as the Federal Reserve embarked on its fastest tightening program in decades.

“Not even tech giants are immune to that,” said Michael O’Rourke, chief market strategist at Jonestrading. “These earnings reports clearly show how inflation is catching up to consumer spending and how rate hikes are whipsawing the economy.” – BLOOMBERG