Nasdaq Rally Gets a Reality Check as Megacaps Miss

Traders piling back into tech stocks just got a sobering signal that they might have gotten ahead of themselves.

(Bloomberg) — Traders piling back into tech stocks just got a sobering signal that they might have gotten ahead of themselves.

More than $160 billion is set to be wiped out from the combined market capitalizations of Apple Inc., Alphabet Inc. and Amazon.com Inc. after the trio reported results after the market close.

Apple and Google parent Alphabet missed estimates, while Amazon gave a disappointing forecast for its lucrative cloud-computing division — showing that demand for hardware, software, advertising and e-commerce is sputtering amid macroeconomic uncertainty and still-high inflation. Shares of all three slid, while the Nasdaq 100 Index were down 1.8%. Stocks also fell after the January jobs report pointed to a hot labor market, highlighting that the Federal Reserve has room to keep raising rates.

The reality check comes after a stellar start to the year for the Nasdaq 100, which had been on the brink of entering bull-market territory after a rebound spurred by speculation that the Federal Reserve will pivot to easier monetary policy. Bright spots including results from Meta Platforms Inc. — which soared 23% on Thursday after laying out plans to become leaner and more efficient — also helped.

“The big wild card for markets is: will the Fed be enough of a tailwind to offset the headwind of weaker revenue?,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “I expect revenue will weaken throughout the first half of the year. You saw it with Microsoft, and it looks like we’re seeing it with Amazon and Alphabet.”

The three reports may mark a turning point for a FOMO-fueled tech rally that persisted even after results earlier in the season from the likes of Microsoft Corp. and Intel Corp. sounded alarm bells about how earnings will hold up in an economic downturn. Strategists are warning that stocks may have run too far, too fast.

“We don’t think you should get carried away with momentum, because the people driving it may not be looking out past the end of the week or even the end of the day,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “We continue to expect a recession and for earnings to continue to contract,” he said.

Bank of America Corp. strategist Michael Hartnett echoed the view, writing in a note on Friday that investors risk sleepwalking into a brutal selloff after a US stock rally that has already gone too far.

With most of the biggest tech company reports — as well as this week’s Federal Reserve meeting — out of the way, traders will now turn to the earnings season stragglers for clues as to what’s next for tech stocks. Results from Uber Technologies Inc., eBay Inc. and Salesforce Inc. are due in the coming weeks.

“If the picture stops being about the Fed and rates, and it turns back to fundamentals and earnings, investors will have less reason to cheer,” said Wells Fargo’s Samana.

Tech Chart of the Day

Stretched technical levels may indicate that the Nasdaq 100 Index’s rally is due a breather. The 14-day relative strength index is now in overbought territory for the first time since November 2021, and in the past the tech-heavy gauge retreated when approaching or crossing such levels. “We’re overbought, and while we could get more overbought, the market may be running on fumes here,” said Wells Fargo’s Samana.