Big Tech's solid earnings fail to stop sell-off by investors

Analysts cite concerns that tech counters are overpriced and rally has gone too far, too fast

People checking out the new iPhones at an Apple store in San Francisco earlier this month. Apple has reported quarterly results that topped Wall Street estimates after record sales of Macs and services made up for a delayed iPhone 12 launch. But its
People checking out the new iPhones at an Apple store in San Francisco earlier this month. Apple has reported quarterly results that topped Wall Street estimates after record sales of Macs and services made up for a delayed iPhone 12 launch. But its shares dropped almost 5 per cent after the firm revealed iPhone revenue missed the average of analysts' estimates. PHOTO: BLOOMBERG

NEW YORK • Solid quarterly earnings from America's biggest tech firms were not enough to keep investors from selling late on Thursday, the latest sign that sentiment is turning against ultra-expensive digital megacaps.

Futures on the S&P 500 tumbled 1 per cent and Nasdaq 100 contracts lost more than that as of 6:07pm on Thursday in New York. Stocks had rebounded from the worst sell-off in four months during the regular session ahead of the slate of megacap results on better-than-expected US economic data.

The slide follows a red-hot run earlier this year that saw the tech giants help haul US equities to new highs amid a rampant coronavirus outbreak and severe economic downturn.

"As we've seen in reactions from some of the earnings from these large companies even beats are not strong enough to satisfy this market, which I think speaks to how fully valued a lot of these stocks are," said Mr Evan Brown, head of multi-asset strategy at UBS Asset Management.

The quartet of reports comes after a wild two days for megacap tech. The Nasdaq 100 plunged 3.5 per cent for the biggest rout in four months on Wednesday before rebounding almost 2 per cent in Thursday's cash session.

While the companies continue to deliver strong earnings, investors have turned their focus to whether a slower-growing economy will enable profit growth that justifies sky-high valuations.

Facebook was little changed even after sales topped estimates when it warned of continued uncertainty due to Covid-19 next year and said it plans to spend heavily on employees and new technology. The social network makes up more than 4 per cent of Nasdaq's holdings.

Apple reported quarterly results that topped Wall Street estimates after record sales of Macs and services made up for a delayed iPhone 12 launch. But its shares dropped almost 5 per cent after the firm revealed iPhone revenue missed the average of analysts' estimates.

Amazon lost more than 1 per cent after it said it planned to spend more than analysts estimated related to Covid-19. Otherwise, the online retailer projected a steep jump in sales in the current quarter, topping analysts' estimates, indicating that it expects the surge in online shopping during the pandemic to extend through the holiday season.

Twitter also reported on Thursday and its shares got hammered on concern about its user growth. Third-quarter sales exceeded estimates and results were boosted by a return of advertisers who had fled or pulled back from the website during the early stages of the Covid-19 pandemic. The stock lost 14 per cent.

Alphabet was a bright spot, rallying 8 per cent after it returned to growth in the third quarter following a decline in the previous period, fuelled by digital advertising. The Google parent reported third-quarter revenue, minus the cost of distribution deals for its search engine, rose 15 per cent to US$38 billion (S$51.9 billion).

  • 24%

    The quantum that the share price of Facebook, Amazon, Apple and Alphabet, as a group, has risen by since the start of the year.

However, the results failed to soothe concern that the rally in tech shares has gone too far, too fast. Optimism that their ability to cater for stay-at-home demand would help insulate the industry from a broad profit slump during the pandemic has sent their shares up 24 per cent as a group since the start of the year, about 10 times as big as the S&P 500.

"It tells us that even though these stocks are below their late-summer highs, they're still expensive," said Mr Matt Maley, chief market strategist at Miller Tabak + Co. "So unless they beat expectations in a significant way, investors are taking further profits.

"Who can blame them, given that the capital gains tax is going to rise if (Democrat Joe) Biden wins next week?"

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 31, 2020, with the headline 'Big Tech's solid earnings fail to stop sell-off by investors'. Print Edition | Subscribe