Can Google, Intel and Microsoft Reverse Tech Sector Earnings Expectation Trend?
Earnings reports for U.S. technology companies are set to launch, with Google Inc. (NASDAQ:GOOG), Intel Corp. (NASDAQ:INTC) and Microsoft Corp. (NASDAQ:MSFT) leading the pack. Investors who want to place broad bets on the sector should watch the trend of earnings-estimate revisions. This data can show whether tech companies as a whole are more likely go beyond, meet or miss expectations in the next three weeks.
According to the latest data from Zacks Investment Research, as of now, the indicator is in a bearish trend due to downward earnings revisions. In contrast, during the post-recession bull market that started in March 2009, upward revisions well outpaced downward revisions.
Dirk van Dijk, chief equity strategist for Zacks.com, reported that the overall trend for earnings is “now well into bearish territory.” The trend for tech looks even worse. If it continues on its current path, it will show tech companies in the fourth quarter saw an even greater decline in net-income growth than is now expected by analysts.
In the past three years of a bull market, corporate earnings for a specific quarter seem to finish higher than predicted at the beginning of that same quarter. Estimate revisions are inclined to increase in weeks nearing earnings season, while analysts become more confident all the negative news is priced into a particular stock on the eve of earnings.
The revision ratio for the fourth quarter has been dropping for some time. It was at 0.53 the second week of January. In late December, the tech sector ratio was even lower at 0.32 and declining. The Nasdaq has since increased 4 percent, in line with the broader market. The price-to-earnings ratio for the tech component of the S&P 500 is 12, based on predicted 2012 earnings, which is lower than that of the previous two years, yet still somewhat higher than the P/E of the index as a whole, which is 11.6.
Investors will usually pay more for tech stocks because they are typically more profitable. However, tech earnings are also often unpredictable. Given that the market has priced in these expectations, this situation will be taken care of in one of two ways: If tech firms either keep or boost their first-quarter predictions, the sector can expect a rally. However, the current estimate-revision trend shows those predictions are dropping, and if they do, investors seeking growth should look elsewhere or wait to buy when market prices are below expectations.