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BusinessTech companies are tweeting out of the herd... so what about the...

Tech companies are tweeting out of the herd… so what about the second quarter?


A report by “Bloomberg” described technology companies as a “bright spot” during the first quarter of this year 2023, despite the problems plaguing the US economy that put it on the brink of recession.

The report mentions a number of data – as the first quarter earnings season draws to a close – that reflects the pain of “Wall Street”, which awaits one of the longest periods of falling corporate earnings, such as follows:

The last quarter of the year is the second consecutive quarter of declining US corporate profits (the last longest period of declining profits was three consecutive quarters between 2015 and 2016) of 3.7%. ). Although 78% of companies exceeded previous earnings expectations (according to Bloomberg Intelligence), it is taken into account that these expectations were lowered by analysts before the start of the year in the first place. In the second quarter of the year (from April to the end of June), a decline in profits of 7.3% is expected. At a time when analysts expect the impact of monetary and interest rate tightening to last into the third quarter. Analysts expect profit margins not to recover until the fourth quarter of this year.

Technology companies

Regarding technology companies, the report highlighted that companies such as (Apple, Meta, Alphabet and Amazon) have exceeded all expectations, noting that these companies benefit from the upcoming US Federal Reserve policy guidance on signals to stop rising interest rates. .

For his part, Ahmed Moati, Executive Director of VI Markets, in his interview with Sky News Arabia, attributes the survival of tech companies after the record drop in corporate profits in the United States to two main factors:

The first factor

The companies’ strategy related to smart cost reduction, based on their assessment of the state of the US economy and future prospects. The cost reduction strategy was based on two main factors; The first: reducing the number of employees in technology companies, with a number of companies also informing their employees not to increase salaries, and the second: not expanding into new projects.

The second factor

The second factor is related to the great advances that the sector has experienced in the field of “artificial intelligence” and after the boom made by giant technology companies in this context.

Expected decline

However, he does not believe that this rise is likely to last in the second quarter results of this year, in light of current indicators, especially in light of the “black swan” theory which currently dominates the markets with the fear of investors. . of a new catastrophe of an unknown nature Hedging procedures and issuance of sell orders, which strongly affect the American market.

This is in line with what was mentioned in the aforementioned report regarding expectations of a decline in profits for companies operating in the technology sector, which would have been in the order of more than 7% during the second quarter, which ends next June. Analyst estimates from Bloomberg Intelligence indicate that corporate earnings growth in the sector could lag the Standard & Poor’s 500 index through 2024, making these stocks vulnerable. Technology companies account for 35% of the market capitalization of the “Standard & Poor’s 500” but at the same time account for around 30% of its profits.

The report quotes Great Hill Capital chief Thomas Hayes as describing the sector’s upcoming stock decline as something known in advance, provided earnings return expecting a recovery in 2024.

Uncertainty grips the markets

Returning to the CEO of VI Markets, he goes on to say: The current state of uncertainty is affecting US equities in general, including technology companies, with the constant fear of recession, uncertainty dominating the economic scene, the debt ceiling crisis, and before the banking crisis.

But he believes at the same time that “for technology companies, maybe if there is a faster movement and new products related to artificial intelligence, it would support their position to avoid a decline”.

This was also indicated by the aforementioned report, which considered that developments in artificial intelligence were a key element in companies’ profitability aspirations, deduced by the rise in shares of NVIDIA, Microsoft and Alphabet, and this are the three companies running in the field of AI competition, and they are among the biggest contributors to this year’s core index.

Temporary decline can be prolonged

For his part, economics professor at the University of Southern California, Aris Protopapadakis, says in exclusive statements to the “Sky News Arabia Economy” site:

Over the long term, the stock market grows relentlessly at a rate of 6% or more per year, on average. This is average growth, but it certainly does not apply to individual stocks. All losses in this context are “temporary”, however they may last a long time, depending on each company’s terms of reference and policies.

It is believed that the growing risks in the economy will lead to lower stock prices in general; Because investors need incentives to hold riskier portfolios.

Regarding the impact of banking sector turmoil on US equities in general, the University of Southern California economics professor said in his interview with “Economy Sky News Arabia”: I don’t think bank failures such than the ones we’ve recently seen in the United States will cast a shadow over the US stock market. But if the Republicans chose to create a debt crisis over raising the debt ceiling and the courts refused to enforce the Fourteenth Amendment, it would certainly create a serious crisis and lead to lower US stock prices, most likely strongly.

Profits reflect the economic situation

For his part, the founder and chief researcher of the Problem Lab at the Canadian University of Waterloo, Larry Smith, says in statements exclusive to “Sky News Arabia Economy”:

Tech earnings still show that North American economies have slowed but not entered a recession. If the economy enters a recession, we can expect the benefits of technology to erode, which is not the case yet.

Regarding the expected performance of technology companies in the second quarter of the year, a professor from a department at the Canadian University of Waterloo adds: “There is a lot of uncertainty…and anyone who claims otherwise only guessing… It is impossible to foresee the war in Ukraine which could further destabilize the stability of the world economy.

“Inflation is down in many places around the world, but not everywhere…while food and energy prices remain very volatile,” he said.

And on the extent of the impact of ‘layoffs’ on tech company earnings, he added: “In the short term, layoffs in the tech industry do not immediately improve bottom lines due to severance pay. of departure”.

He concludes by noting that investors currently view tech stocks with caution and may also consider the complexities and uncertainties of the current situation.

Corrective movement

Regarding the technology sector in general, the CEO of the Center for Strategic Studies “Quorum”, Tariq Al-Rifai, points out in exclusive statements to “Sky News Arabia Economy” that technology companies in general and the Nasdaq index reached the peak (the highest level) in December 2021. Then a correction occurred in the index and the sector as a whole, to witness a sharp decline during the year 2022, and at the same stage where the US Federal Reserve began raising interest rates.

And he continues: “We noticed that the sector was very sensitive to the rise in interest (..)”, explaining that with the start of the current year 2023, “we have seen a recovery in this indicator and the sector, but it is still low compared to the peak reached at the end of 2021.”

However, the CEO of the Center for Strategic Studies “Korum” does not believe that with this recovery, the correction process is over, and now the sector is experiencing a period of recovery, especially since the Federal Reserve is still on the right way to raise interest rates, in addition to the pressure the sector is suffering in terms of money draining into safe havens such as US Treasuries, gold, etc.

Many dimensions of growth

For his part, Professor of Economics at the Kogod School of Business in the United States, Jeffrey Harris, said in exclusive statements to “Sky News Arabia Economy”: “In general, technology sectors are growing despite the economic conditions. Software, for example, has proven to be With many dimensions of growth, the software and services sectors continue to grow even as the overall economy stagnates.

He adds, “Retail sales contraction and other negative economic trends are slow to emerge in the tech sector,” but at the same time, he doesn’t deny what he described as the “suffering” of microprocessors. and hardware components in technology and production. problems in this area, some bottlenecks in the supply chain that have affected other industries.

In his estimates of the performance of tech companies in the second quarter of this year, Harris says, “The layoffs we saw in the last quarter of last year are a specific testament to the fact that tech companies have become more cost-sensitive. . These recent layoffs indicate that departments are trying to address expected weaknesses in the sector.

While it is noted that labor costs tend to increase in the technology sector, since human capital is needed to establish, develop and improve most technology platforms, he believes that in this context, the sector will see a decline in the coming quarters as pressures intensify in the economy of this growing business.

With the financial sector coming under immediate pressure from high interest rates and high inflation immediately affecting consumer goods, Harris expects these pressures to take longer to seep into the sectors under pressure. development such as technology with the same intensity.

And the professor of economics at the Kogod School of Business in the United States concludes his remarks by saying: “We have seen continued strength in tech company stocks. ETFs and portfolios in the sector saw some of the strongest equity returns in 2023 as investors sought companies with less exposure to interest rates and consumer retail. “.. And if we were to believe that the stock market is a good forward-looking measure of investor expectations, I would say that tech stocks continue to be viewed positively by the investing community. It will be interesting to see how that outlook evolves over time. coming quarters with lower inflation.

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Arab Desk
Arab Desk
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