Tech Earnings On Tap - Priced For Perfection?

Tech stocks continue to appreciate regardless of any ebb and flow in the COVID-19 backdrop or the prospect of rising interest rates. Albeit there was a minor sell-off in late February as a function of rising interest rates that has been quickly erased. Tech underpins the stay-at-home economy and the so-called back-to-normal economy. And now more than ever, technology serves as an integral part of every slice of the economy. These stocks have remained strong despite the massive rotation into value stocks throughout 2021. Considering many of these names have appreciated since their February lows and breaking through their 52-week highs, these large-cap tech companies are priced for perfection heading into earnings. Stocks such as Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and the broader index Powershares (QQQ) have appreciated double digits over a two-week period as we head into earnings.

The Value Rotation and Roaring Tech

The market has witnessed a massive sea change as the large-scale vaccination efforts in the US is coming to fruition. The Dow Jones, S&P 500, and Nasdaq have rallied to all-time highs while recovery and value names have recaptured more of their lost market capitalization due to COVID-19. Meanwhile, many technology stocks that powered the market higher in the initial stages of this post-COVID-19 rally have stalled out early in 2021 to now rip higher as well. Once the value rotation began, many high-quality technology names fell from their highs and have traded sideways since their highs back in September. Now tech participation has been a major driver to propel the markets even higher and to even more lofty levels.

Priced for Perfection?

Tech stocks are ostensibly priced for perfection as these massive moves are logged prior to earnings. MSFT, AAPL, AMZN, and the broader Powershares QQQ have appreciated 13%, 11.7%, 11.3%, and 8.9%, respectively, during the first two weeks of April (Figures 1-4). The stocks have either broken out to new highs (MSFT and QQQ) or are approaching their 52-week high (AMZN and AAPL). These are huge moves absent of any earnings to trigger these moves higher in already mature large-cap names. From a technical perspective, these stocks are overbought as measured by the Relative Strength Index (RSI) and upper Bollinger bands being broken.

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Many of the large-cap growth companies are growing at a double-digit clip, possess fantastic balance sheets, and putting up consistent earnings. However, valuations seem to be getting ahead of themselves despite their growth profile with P/E ratios at 81, 39, 36, and 39 for AMZN, MSFT, AAPL, and QQQ, respectively.

Tech AAPL Chart

Tech AMZN Chart

Tech MSFT Chart

Tech QQQ Chart
Figure 1 – Charts of AAPL, AMZN, MSFT, and QQQ highlighting their double-digit run in the first two-week period in April just prior to earnings coming later in the month

Summary

Tech earnings are coming into the fold, and these stocks are ostensibly priced for perfection. Many of the major tech players have appreciated double digits during the first two weeks of April. These are massive moves prior to earnings, specifically for Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and the broader index Powershares (QQQ). From a technical perspective, these stocks are overbought as measured by the Relative Strength Index (RSI) and upper Bollinger bands being broken. Many of the large-cap growth companies are growing at a double-digit clip, possess fantastic balance sheets, and putting up consistent earnings. However, valuations seem to be getting ahead of themselves despite their growth profile. Investors should heed this sharp move higher as earnings loom in the near term. If earnings aren’t perfect, then there may be some weakness ahead.

Noah Kiedrowski
INO.com Contributor

Disclosure: The author does not hold shares in any of the mentioned stocks or ETFs. However, he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.

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