Wall St Week Ahead-Earnings to test growth stocks after rocky start to year



By Lewis Krauskopf

NEW YORK, Jan 14 (Reuters) - A rough start to 2022 for U.S. tech and growth stocks is raising stakes for upcoming earnings reports, as investors seek reasons to keep faith in the shares while bracing for U.S. interest rate hikes.

The S&P 500 information technology sector .SPLRCT , which accounts for nearly 29% of the broader index’s weight, is down 5.5% year-to-date, including steep declines in shares of heavyweights such as Microsoft MSFT.O and Nvidia NVDA.O , both off roughly 9%. The overall S&P 500 .SPX has fallen 2.7%.

Tech bulls hope a strong earnings season can blunt some of the pain, which many pin on rising Treasury yields and expectations that the Federal Reserve will tighten monetary policy and hike rates aggressively to fight inflation.

As the Fed increases short-term rates, investors will keep an eye on how high longer-term U.S. Treasury yields rise. Higher yields more steeply discount the value of future profits, which can especially pressure growth stocks.

"Given the performance of these tech names here recently, will earnings be a savior for them?" said Walter Todd, chief investment officer at Greenwood Capital. "Over the next month, seeing how some of these tech names respond to their numbers ... will be interesting."

Fourth-quarter results season kicks into high gear next week, with overall S&P 500 earnings expected to climb 23.1%, according to Refinitiv IBES. Technology sector earnings .SPLRCT are expected to rise by 15.6%, as other groups have benefited more from the economy's rebound from pandemic lockdowns in 2020.

Companies in the S&P 500 growth index .IGX , which is replete with tech stocks, are expected to increase earnings 16%, compared to a 26% rise for the S&P 500 value index .IVX , more heavily weighted in banks, industrials and other economically sensitive companies, according to Credit Suisse.

Higher interest rates could pressure the stretched valuations of tech stocks, so companies need to deliver impressive numbers in coming weeks, said Kim Forrest, chief investment officer at Bokeh Capital Partners.

"To have the (stock) price go up even in a rising rate/falling multiple environment, you have to show demand for the product," she said.

The tech sector is trading at about 27 times earnings estimates for the next 12 months, near its highest in 18 years, compared to 21 times for the overall S&P 500, according to Refinitiv Datstream.

Netflix NFLX.O , whose shares have slumped over 14% to start the year, reports on Thursday, the first results from the closely watched "FAANG" group of large growth companies. Investors will watch the streaming giant's plans for generating content and its outlook for subscribers.

“If they can surprise to the upside on the number of subscribers, I think that is going to be great for the stock price,” said King Lip, chief strategist at Baker Avenue Asset Management, which owns Netflix shares.

Among the tech and growth names that have struggled in January are Adobe ADBE.O and Salesforce.com CRM.N , both down about 9%, and DocuSign DOCU.O , which has dropped about 15%.

The ARK Innovation ETF ARKK.P , which is filled with growth stocks and was the top-performing U.S. equity fund tracked by Morningstar in 2020, is down over 16% so far this year.

Yet not everyone is convinced Treasury yields will rise much more, or that investors should flee tech shares as the Fed raises rates.

Analysts at Goldman Sachs see the 10-year Treasury yield rising to 2% by the end of the year, "suggesting only a modest further move in longer-term yields," while "the likelihood of slowing economic growth in 2022 is an argument in favor of growth stocks."

The yield on the 10-year Treasury note US10YT=RR stood at 1.76% on Friday, after topping 1.8% earlier in the week.

A study by the Wells Fargo Investment Institute, meanwhile, found the tech sector appreciated an average of 48.1% during five periods of rising interest rates since the 1990s.

The Wells Fargo institute has a favorable rating on the tech sector, along with communication services, industrials and financials.

"This is all a very recent thing where people have almost talked themselves into tech as being rate sensitive,” said Sameer Samana, senior global market strategist at the Wells Fargo institute.
Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.