Techs losing drive

Techs losing drive

The technology companies that have acted as growth drivers for stock markets in recent years are increasingly losing their leading positions. Although it would be too naive to talk about the "beginning of the end" for the IT giants, the initial reaction to the reports of Microsoft and Alphabet makes it seem more like a threat to the recovery of the Nasdaq and S&P500 indices. Shares of both giants are losing around 6.6% post-market.

Microsoft's revenue and profit beat expectations, but investors see more negative numbers in the dynamic (-3.4% QoQ on revenue and -14.4% YoY on profit).

Alphabet noted a tough time in the ad market, with an overall profit fall of 26.6% y/y despite revenue growth of 6.6% y/y. The latter is the lowest rate in 9 years.

Experienced traders have long noticed that companies are likely to present the situation to industry analysts, so they make low projections and easily beat them shortly after in ¾ of the cases. It is, therefore, not uncommon for neutral numbers or a slight overperformance to lead to a share price slump.

Also, in growth sectors, markets are paying increased attention to companies' forecasts. And they have been disappointed. Both Microsoft and Alphabet cited falling PC and ad sales. And that's bad news for the future, as it doesn't set the stage for a turnaround in the coming months. Microsoft's comments about cloud computing cuts also pulled Amazon shares, which are losing 4.3% post-market.

On a more general level, the simple rule of thumb remains that the IT sector is inversely correlated with interest rate movements and is more vulnerable during the economic downturn for which many are now preparing.

Choosing from major US indices - the Dow Jones, S&P 500, and Nasdaq - the first looks the most promising, including more manufacturing companies and a smaller weighting on the IT sector. This driver change can already be seen in that the Dow Jones made its lows in early October, while the other two made their lows on 13 October: the strongest are recovering first. And it is not the Technology sector right now.

Nonetheless, while this trio stays about 20% below the peak and the US Fed forwarding market expectations to slower rate hikes, it looks like the bottom is already behind us.

By the FxPro Analyst Team