Q4 Earnings Season Wrap: Tech Giants Lose Momentum; Cyclicals Attract Attention
Investing.com | Feb 25, 2021 02:02
The just-concluded earning season was, no doubt, another remarkable quarter for stay-at-home winners, especially the mega-cap technology companies. But lethargic reactions to good fourth-quarter earnings reports from the biggest U.S. tech companies also show that investors don’t feel comfortable buying these stocks when their valuations are so high and the reopening trade is in full swing.
Take the example of iPhone-maker Apple (NASDAQ:AAPL), which beat analysts’ estimates on almost every metric. Nevertheless, its shares are down more than 5% since announcing its results on Feb.2.
Of the biggest five stocks in the market, Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) are the only companies whose shares are higher after their earnings reports. The Google-parent has gained 5% since reporting revenue and earnings per share on Feb. 2 that beat the highest analyst estimates, while Microsoft has advanced 6% since Jan. 26.
That lukewarm reaction from investors shows that it may not be possible for the big tech companies to outperform the market again in 2021 as vaccines slowly bring normalcy back to the economy, reducing demand for digital services and hardware.
With the reopening of the economy, investors are also concerned about potential regulation, which should make it harder for tech companies to keep outperforming, considering the premium they command over the general market.
Facebook (NASDAQ:FB) is facing regulatory scrutiny from many jurisdictions over its social media dominance, hurting its stock. The company posted record revenue and profit in Q4 as online holiday shopping soared, increasing the use of the company’s platforms during the pandemic.
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With technology shares taking a backseat, money flows are being diverted to cyclicals whose earnings took a big hit during the pandemic due to the stay-at-home environment. Hopes for an economic rebound are breathing life into everything from small caps to once-ignored stocks like those in the energy sector. The Russell 2000 is poised to beat the NASDAQ 100 for a sixth straight month.
This shift in sentiment, however, reflects the market’s expectation that significant fiscal stimulus combined with the vaccine rollout will increase the demand for commodities and industrial products.
That said, some of the largest energy companies continued to show financial distress in their Q4 earnings. Exxon Mobil (NYSE:XOM) posted its fourth consecutive quarterly loss, bringing its total loss for its fiscal year to more than $22 billion. Rival Chevron (NYSE:CVX) reported its third quarterly loss in a row.
Heavy equipment manufacturer Caterpillar (NYSE:CAT), on the other hand, beat analysts’ expectations for Q4, saying it expects stronger year-over-year sales this quarter, led by construction industries.
The world’s biggest maker of mining and construction equipment is betting on a broad rebound in commodity markets that could restart activity in the metals and oil-exploration businesses after pandemic shutdowns. Its stock has gained about 24% this year, closing Wednesday at $222.47.
Bottom Line
Some of the largest tech giants, who were behind the powerful rebound in equity markets since the March dip, have failed to attract investors despite posting strong growth in Q4. These tech darlings are losing their shine on concerns that their growth will slow once the pandemic is contained and the economy reopens.
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