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Opinion: Tech smell test yields mixed results

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The smell test isn’t always accurate. My wife bought me some fancy hand soap for my side of the master bath. It doesn’t just stink but actually smells like the fish cleaning station at the lake. I must admit, though, that it does soap up nicely.

Right now, investors are giving technology stocks the smell test and are getting mixed results.

Big tech earnings
Investors are focusing this week on big tech earnings from Tesla, Meta (Facebook/Instagram), Alphabet and Microsoft. In a nutshell, if this earnings season is going to boost the whole stock market, these four companies (along with Nvidia and Amazon) will be the reason why.

The electric car maker Tesla was the first of the big tech companies to report earnings. It announced that it missed market projections on revenues and earnings and that its quarterly sales fell the largest amount since 2012. Interestingly, TSLA stock rose after it announced it was close to launching several new, more affordable vehicle models.

Facebook's parent company, Meta, announced it had beaten earnings and revenue estimates but watched its stock fall more than 19% at one point in the hours following the announcement. Investors reacted negatively to Meta’s announcement that its profits would fall because of the expense of adding artificial intelligence to its platforms.

Post-pandemic momentum shift
We are seeing the effects of the momentum shift from pandemic-era tech stocks to post-pandemic tech stocks.

Pandemic favorites PayPal is down 80%, Roku is down 87% and Zoom is down 89% from their pandemic-era highs. The market was propelled a few years ago by these hotshot tech stocks, which did well when interest rates were low. But those stocks have fallen hard in this new investing world of high rates and less need for their services.

A lot has changed in the markets since 2020 and 2021, with the most significant change being a new high-rate environment that is making every business more expensive to operate in. The stocks we are seeing rally now are the ones investors feel will make the biggest profits in this current high-rate environment. But even those big companies are a mixed bag; Nvidia has been one of the S&P 500's best performers, while Tesla has been one of the worst this year.

There is a lot of pressure on the big tech stocks to keep pushing the market forward. Alphabet, Meta, Microsoft, Amazon and Nvidia are expected to contribute 5 points to S&P 500 first-quarter earnings per share growth. In contrast, the index’s other 495 aren’t likely to generate any earnings growth.

I am carefully watching the rest of big tech’s earnings reports. I am currently keeping my clients fully invested and maintaining a neutral stance on equities, but I am ready to change course quickly if needed. I expect the current volatility we experience to continue for a short time, but expect stocks to react positively as the Fed cuts rates later this year and businesses keep focusing on profits.

I still use the smell test pretty regularly, whether for soap or some week-old milk, but the smell test with stocks is slightly different. During the pandemic, the smell test was the buying trends of the American people, but now it is back to profits.

Personally, since I’m a germaphobe, I like good soap even if it stinks, but as an investment manager, profits can’t ever stink.

Richard Baker, an accredited investment fiduciary, is the founder and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at richard@ferventwm.com.

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