NEW YORK, Jan 14 (Reuters) - A rough start to 2022 for U.S.
tech and growth stocks is raising stakes for upcoming earnings
reports, as investors seek reasons to keep faith in the shares
while bracing for U.S. interest rate hikes.
The S&P 500 information technology sector, which
accounts for nearly 29% of the broader indexs weight, is down
5.5% year-to-date, including steep declines in shares of
heavyweights such as Microsoft and Nvidia,
both off roughly 9%. The overall S&P 500 has fallen 2.7%.
Tech bulls hope a strong earnings season can blunt some of
the pain, which many pin on rising Treasury yields and
expectations that the Federal Reserve will tighten monetary
policy and hike rates aggressively to fight inflation.
As the Fed increases short-term rates, investors will keep
an eye on how high longer-term U.S. Treasury yields rise. Higher
yields more steeply discount the value of future profits, which
can especially pressure growth stocks.
"Given the performance of these tech names here recently,
will earnings be a savior for them?" said Walter Todd, chief
investment officer at Greenwood Capital. "Over the next month,
seeing how some of these tech names respond to their numbers ...
will be interesting."
Fourth-quarter results season kicks into high gear next
week, with overall S&P 500 earnings expected to climb 23.1%,
according to Refinitiv IBES. Technology sector earnings
are expected to rise by 15.6%, as other groups have
benefited more from the economy's rebound from pandemic
lockdowns in 2020.
Companies in the S&P 500 growth index, which is
replete with tech stocks, are expected to increase earnings 16%,
compared to a 26% rise for the S&P 500 value index, more
heavily weighted in banks, industrials and other economically
sensitive companies, according to Credit Suisse.
Higher interest rates could pressure the stretched
valuations of tech stocks, so companies need to deliver
impressive numbers in coming weeks, said Kim Forrest, chief
investment officer at Bokeh Capital Partners.
"To have the (stock) price go up even in a rising
rate/falling multiple environment, you have to show demand for
the product," she said.
The tech sector is trading at about 27 times earnings
estimates for the next 12 months, near its highest in 18 years,
compared to 21 times for the overall S&P 500, according to
Netflix, whose shares have slumped over 14% to
start the year, reports on Thursday, the first results from the
closely watched "FAANG" group of large growth companies.
Investors will watch the streaming giant's plans for generating
content and its outlook for subscribers.
If they can surprise to the upside on the number of
subscribers, I think that is going to be great for the stock
price, said King Lip, chief strategist at Baker Avenue Asset
Management, which owns Netflix shares.
Among the tech and growth names that have struggled in
January are Adobe and Salesforce.com, both down
about 9%, and DocuSign, which has dropped about 15%.
The ARK Innovation ETF, which is filled with growth
stocks and was the top-performing U.S. equity fund tracked by
Morningstar in 2020, is down over 16% so far this year.
Yet not everyone is convinced Treasury yields will rise much
more, or that investors should flee tech shares as the Fed
Analysts at Goldman Sachs see the 10-year Treasury yield
rising to 2% by the end of the year, "suggesting only a modest
further move in longer-term yields," while "the likelihood of
slowing economic growth in 2022 is an argument in favor of
The yield on the 10-year Treasury note stood at
1.76% on Friday, after topping 1.8% earlier in the week.
A study by the Wells Fargo Investment Institute, meanwhile,
found the tech sector appreciated an average of 48.1% during
five periods of rising interest rates since the 1990s.
The Wells Fargo institute has a favorable rating on the tech
sector, along with communication services, industrials and
"This is all a very recent thing where people have almost
talked themselves into tech as being rate sensitive, said
Sameer Samana, senior global market strategist at the Wells
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and