Investors Have Been Giving Tech Stocks a Hard Time Lately, Despite Strong Earnings

Key Takeaways

• Investors haven’t been rewarding tech companies’ stocks for strong results this earnings season, according to a report from Bank of America.

• Worries about an AI bubble and the sustainability of spending have weighed on stocks in the sector lately.

• Several Wall Street experts have said they expect sentiment to shift back in favor of the AI trade, given fundamental growth.

Tech companies are driving blowout results this earnings season. But investors aren’t rewarding their stocks the way they usually do.

Of the less than 30% of S&P 500 companies that have already reported earnings so far, nearly 90% have reported better-than-expected earnings, according to FactSet, with the tech sector among the strongest contributors. However, companies that beat profit and sales estimates recently have only outperformed the S&P 500 by an average of 1.2 percentage points the day after their results, a bit below the historical average of 1.4 points, analysts at Bank of America found. Tech stocks have lagged by about 2.6 points.

“Following several years of strong growth and upward revisions, good results are no longer enough to move the needle in tech so far this quarter,” the analysts wrote, amid growing unease around the sustainability of AI spending. This week, expected to be one of the busiest of this earnings season, could test whether that trend continues, or sentiment shifts back in the AI trade’s favor.

Why This Matters to Investors

Earnings this week from some of the biggest names in tech could underscore weakening sentiment around the AI trade, or help rekindle enthusiasm for the industry after a pullback in recent weeks.

This week, 169 companies of the S&P 500 are slated to report quarterly results, including Magnificent 7 members Microsoft (MSFT), Meta (META), Apple (AAPL) and Amazon (AMZN). That’s after investors sent Tesla (TSLA) shares tumbling after the EV maker revealed its investments in AI and R&D squeezed profits. Alphabet’s (GOOGL) stock also took a hit despite earnings that topped Street estimates, after the company warned it plans to boost spending on its AI buildout. Intel (INTC) saw its stock slide too, even after posting blowout results.

Still, several Wall Street firms including Morgan Stanley, Mizuho and Oppenheimer, have said they see sentiment eventually shifting back in favor of tech stocks, given fundamental growth trends. “Looking at current valuations and the current earnings season, more factors appear to be getting better than getting worse,” Oppenheimer analysts wrote in a note Monday, telling clients tech remains one of their favorite sectors. An anticipated resolution to tensions in the Middle East and subsequently improving economic backdrop could also stand to lift the stocks, Oppenheimer said.

Morgan Stanley analysts told clients Monday they would view recent weakness as an opportunity to buy the dip in AI stocks, particularly the hyperscalers like Meta, Alphabet, Microsoft and Amazon. “Bottom line: we’re bullish on the ‘Intelligence Superhighway,’” they wrote.

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