As a new quarter begins, investors are starting to get ready for another earnings season. This time, the stakes could be particularly high for tech names, including Apple stock (AAPL) - Get Free Report.
Wedbush’s Dan Ives, who is currently the most bullish Wall Street analyst on AAPL at a price target of $220, has recently shared his preliminary thoughts about the upcoming tech earnings season. Below, we look at a few key takeaways and my opinions on them.
(Read more from Apple Maven: AAPL Bears Do A Happy Dance: Were They Right?)
2001 and 2008 all over again
One of the quotes that stuck out the most to me from Dan’s recent report was the following:
“We compare investor negative sentiment today to what we have seen only two other times in our decades of covering tech stocks: 2008 and 2001.”
As a reminder, 2001 preceded the worst of the 2000-2002 stock market crash that became known as “the bursting of the dot-com bubble”. From March 2000 to September 2002, both AAPL and the Nasdaq (QQQ) - Get Free Report corrected by a whopping 75%-plus. See the chart below.
Considering that Apple stock has been down “only” 20% so far this year (although the Nasdaq 100 has already dipped 30% from the peak), comparing the current environment to 2001 seems a bit exaggerated. But on second thought, maybe it isn’t.
From conversations that I have had with investors and market professionals lately, I also sense quite a bit of bearishness and skepticism. Data from AAII, the American Association of Individual Investors, seem to support the idea.
The chart below shows that, at the end of September, investor sentiment reached a historic low: nearly 61% of survey respondents claimed to be bearish about the market (granted, this is not limited to the tech sector). Over the past 35 years, only in 1990 and 2009 has the number been any worse than this.
Also keep in mind that, while Apple stock has not corrected much in 2022, many high-growth tech names already have. Think of the ARK Innovation fund (ARKK) - Get Free Report, for example. This group of innovative companies has seen their stocks dip by a painful 63% in the past year.
In my view, extreme caution can be explained by one set of factors: rarely-before-seen inflation that has pushed Central Banks to act very hawkishly. The worst part is that both the end of this inflationary period and the maximum that rates can reach are very hard to estimate today.
3Q earnings to trigger extreme reactions
The other quote in Dan Ives’s report that I found particularly interesting was the following:
“3Q earnings season [...] will either expose the negative underlying fundamentals across the tech space and cause massive earnings cuts into 2023 along with further multiple compression OR instead prove that the bearishness and the demise of growth tech were premature and many pockets of tech are holding up well despite the dark storm clouds.”
The main message here is that investors should expect extreme reactions from the market following the tech earnings season. Either the sector will confirm fears, leading to the downward spiraling of estimates and sentiment, or the greenlight will be flashed for tech stocks to rebound on the back of better-than-expected results.
Here, I bet we will see a mixed bag of winners and losers. Many tech companies have been laying off employees lately or enacting hiring freezes – including big names, like Meta (META) - Get Free Report. It is hard to imagine these companies conveying an upbeat message to investors this time.
But then, there are the Apples and the Microsofts (MSFT) - Get Free Report of the world. These companies have proven in the last few years that they can execute very well, even when faced with adversity.
Were I to bet on winners in 3Q, I think that the usual suspects in Big Tech, AAPL and MSFT included, are the most likely to outshine the rest.
Earnings season is around the corner. What do you think will happen when tech companies report 3Q results later this month?
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