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Will the Nasdaq ETF Lose Shine on Weak Tech Earnings?
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The technology sector, which had its best January in decades, lost some momentum lately following a slew of weak earnings reports from the tech titans. Hawkish remarks from Fed officials added to the softness.
As such, the tech-heavy Nasdaq Composite Index lost 3.4% over the past week. Still, the ETFs managed to remain in green in the same time frame. Invesco QQQ (QQQ - Free Report) , which serves as a proxy to the index, gained 1.1% in a week.
QQQ in Focus
Invesco QQQ provides exposure to the 101 largest domestic and international non-financial companies listed on the Nasdaq. Information technology accounts for 50.3% of the assets, while communication services and consumer discretionary make up for a 16.6% and 15.6% share, respectively.
Invesco QQQ is one of the largest and most-popular ETFs in the large-cap space, with AUM of $164 billion and an average daily volume of around 43.5 million shares. Invesco QQQ charges investors 20 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Weak Tech Earnings
Earnings from 79.9% of the sector’s market capitalization that have reported results so far are down 20% from the same period last year on 4.2% lower revenues, with 65.1% beating EPS estimates and 67.4% beating revenue estimates. The earnings beat ratio is the lowest in the preceding 20 quarters, while the revenue surprise is also toward the lower end of the 5-year range. Overall, the sector is expected to report an earnings decline of 18.2%.
Apple Inc. (AAPL - Free Report) reported dismal first-quarter fiscal 2023 results as it missed the Zacks Consensus Estimate for earnings for the first time since 2016. The tech giant posted its largest year-over-year quarterly revenue decline since 2019 and the biggest annual quarterly revenue drop since September 2016. Alphabet (GOOGL - Free Report) also disappointed investors, missing estimates on both earnings and revenues as the ongoing economic slowdown has affected the company’s digital ad business (read: ETFs in Focus on Apple's First Earnings Miss Since 2016).
Intel (INTC - Free Report) also came up with weaker results and offered a weak outlook for 2023, citing cooling demand for its chips used in personal computers. Although Amazon (AMZN - Free Report) beat earnings and revenue estimates, it posted the least profitable holiday quarter since 2014 and the biggest-ever annual loss as a public company (read: ETFs in Focus Posts Amazon's Biggest Annual Loss Ever).
Microsoft (MSFT - Free Report) earnings topped estimates but it missed on revenues and forecast weak cloud revenues. Meanwhile, Facebook’s parent company Meta Platforms (META - Free Report) also reported better-than-expected earnings and revenue numbers. Though the social media giant reported its third consecutive quarterly drop in revenues, it provided an upbeat revenue forecast, signaling a rebound in demand for digital ads after months of weak sales.
Other Factors
In addition to weak earnings, layoffs will dampen the short-term outlook for tech stocks. Additionally, investors are reversing their bullish action on the sector by putting money into inverse Nasdaq ETF. ProShares UltraPro Short QQQ (SQQQ - Free Report) , which bets against the performance of the 100 largest companies listed on the Nasdaq Stock Market, saw a record monthly inflow of $1.9 billion in January, according to Bloomberg data. It also pulled in around $621 million in capital so far in February (read: 5 ETFs That Gained Investors' Love Last Week).
Slower Rate Hike Bets: A Positive
The bets that the Fed might slow down the rate hike plan will drive the tech stocks higher, as inflation is cooling, wage growth is decelerating and consumer confidence is increasing. A pause in interest rate increases is a positive sign for technology stocks.
As the tech sector relies on borrowing for superior growth, it is cheaper to borrow more money for further initiatives when interest rates are low. The latest action by the Fed signals that it could be closer to pausing its current rate-hiking campaign. The central bank lifted its benchmark interest rate by 0.25 percentage points to 4.5-4.75% in the latest meeting (read: 5 ETFs to Ride On as Nasdaq Clocks Best January in 20 Years).
The Fed’s smaller rate increase after its first monetary policy meeting of the year reflects growing confidence that inflation is on a downward trajectory after several months of encouraging data. Chair Jerome Powell said, "the disinflationary process has started" in the world's largest economy, although he signaled that interest rates would continue to rise and cuts were not in the offing. Moderating inflation, rising GDP growth and a resilient jobs market indicate that the economy is holding steady and might remain strong.
Further, the Nasdaq is statistically highly oversold versus the S&P 500 right now, per various market participants.
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Will the Nasdaq ETF Lose Shine on Weak Tech Earnings?
The technology sector, which had its best January in decades, lost some momentum lately following a slew of weak earnings reports from the tech titans. Hawkish remarks from Fed officials added to the softness.
As such, the tech-heavy Nasdaq Composite Index lost 3.4% over the past week. Still, the ETFs managed to remain in green in the same time frame. Invesco QQQ (QQQ - Free Report) , which serves as a proxy to the index, gained 1.1% in a week.
QQQ in Focus
Invesco QQQ provides exposure to the 101 largest domestic and international non-financial companies listed on the Nasdaq. Information technology accounts for 50.3% of the assets, while communication services and consumer discretionary make up for a 16.6% and 15.6% share, respectively.
Invesco QQQ is one of the largest and most-popular ETFs in the large-cap space, with AUM of $164 billion and an average daily volume of around 43.5 million shares. Invesco QQQ charges investors 20 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Weak Tech Earnings
Earnings from 79.9% of the sector’s market capitalization that have reported results so far are down 20% from the same period last year on 4.2% lower revenues, with 65.1% beating EPS estimates and 67.4% beating revenue estimates. The earnings beat ratio is the lowest in the preceding 20 quarters, while the revenue surprise is also toward the lower end of the 5-year range. Overall, the sector is expected to report an earnings decline of 18.2%.
Apple Inc. (AAPL - Free Report) reported dismal first-quarter fiscal 2023 results as it missed the Zacks Consensus Estimate for earnings for the first time since 2016. The tech giant posted its largest year-over-year quarterly revenue decline since 2019 and the biggest annual quarterly revenue drop since September 2016. Alphabet (GOOGL - Free Report) also disappointed investors, missing estimates on both earnings and revenues as the ongoing economic slowdown has affected the company’s digital ad business (read: ETFs in Focus on Apple's First Earnings Miss Since 2016).
Intel (INTC - Free Report) also came up with weaker results and offered a weak outlook for 2023, citing cooling demand for its chips used in personal computers. Although Amazon (AMZN - Free Report) beat earnings and revenue estimates, it posted the least profitable holiday quarter since 2014 and the biggest-ever annual loss as a public company (read: ETFs in Focus Posts Amazon's Biggest Annual Loss Ever).
Microsoft (MSFT - Free Report) earnings topped estimates but it missed on revenues and forecast weak cloud revenues. Meanwhile, Facebook’s parent company Meta Platforms (META - Free Report) also reported better-than-expected earnings and revenue numbers. Though the social media giant reported its third consecutive quarterly drop in revenues, it provided an upbeat revenue forecast, signaling a rebound in demand for digital ads after months of weak sales.
Other Factors
In addition to weak earnings, layoffs will dampen the short-term outlook for tech stocks. Additionally, investors are reversing their bullish action on the sector by putting money into inverse Nasdaq ETF. ProShares UltraPro Short QQQ (SQQQ - Free Report) , which bets against the performance of the 100 largest companies listed on the Nasdaq Stock Market, saw a record monthly inflow of $1.9 billion in January, according to Bloomberg data. It also pulled in around $621 million in capital so far in February (read: 5 ETFs That Gained Investors' Love Last Week).
Slower Rate Hike Bets: A Positive
The bets that the Fed might slow down the rate hike plan will drive the tech stocks higher, as inflation is cooling, wage growth is decelerating and consumer confidence is increasing. A pause in interest rate increases is a positive sign for technology stocks.
As the tech sector relies on borrowing for superior growth, it is cheaper to borrow more money for further initiatives when interest rates are low. The latest action by the Fed signals that it could be closer to pausing its current rate-hiking campaign. The central bank lifted its benchmark interest rate by 0.25 percentage points to 4.5-4.75% in the latest meeting (read: 5 ETFs to Ride On as Nasdaq Clocks Best January in 20 Years).
The Fed’s smaller rate increase after its first monetary policy meeting of the year reflects growing confidence that inflation is on a downward trajectory after several months of encouraging data. Chair Jerome Powell said, "the disinflationary process has started" in the world's largest economy, although he signaled that interest rates would continue to rise and cuts were not in the offing. Moderating inflation, rising GDP growth and a resilient jobs market indicate that the economy is holding steady and might remain strong.
Further, the Nasdaq is statistically highly oversold versus the S&P 500 right now, per various market participants.