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Big Tech May Be In Trouble This Earnings Season

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Microsoft (MSFT - Free Report) beat big on top and bottom-line estimates, far exceeding analysts' expectations, yet the stock fell over 2%. This innovation-driven enterprise has been provided with a strong pandemic tailwind with its cloud-oriented business model experiencing robust demand growth through this medically induced economic coma. So why did the stock fall, and what does this mean for the rest of big tech?

Why MSFT Sold After Earnings Beat

Microsoft is notorious for under-promising and overdelivering, surpassing analysts' EPS and sales estimates for 15 consecutive quarters. Analysts this quarter have been exceptionally conservative with their predictions because of the extreme amount of uncertainty, setting MSFT for another ostensibly fruitful earning release.

Institutional investors were aware of this and had already priced in an earnings beat. Now that they saw what they wanted from Microsoft's quarterly report, investors are ready to reallocate their capital into some of this past quarter's cyclical underperformers.

What This Means For The Rest Of Big Tech

Microsoft had 66% growth from its March lows to its July highs, and investors are still getting wary about its lofty valuation. Apple (AAPL - Free Report) and Amazon (AMZN - Free Report) both over doubled their share price in that time frame, pushing their stocks to valuations that even frothier than MSFT. An earnings beat may not be enough for big tech to sustain its seemingly overzealous valuations through earnings season.

Tech's parabolic returns over the past quarter have to peak at some point. What better time for that to happen than earning season when investors are reassessing their portfolio risk/reward ratio and sector allocations.

Obviously, nothing is guaranteed in this crazy, unpredictable market, but I am hedging my tech-heavy portfolio with some August 21st expiring QQQ puts.

It may not be a bad idea to rotate some of your big tech profits into underperforming cyclical sectors such as high yielding utilities, or REITs, which offer an opportunity for capital growth and sustainable quarterly dividends as the economy recovers.

Below is a breakdown of what stocks to focus on over the next week of earnings along with analysts' estimates.

The Takeaway

Tech isn't a safe-haven amid this highly uncertain earnings season. Tech stocks prolific returns have to hit a peak at some point and what better time than mid-year earnings. Be careful with stock purchases over the next month and consider rotating some profits into underperforming cyclical names.

The Hottest Tech Mega-Trend of All

Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

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