Tech Estimates Show How Fast Wall Street Sees Earnings Restored

(Bloomberg) -- By now, the story of the S&P 500’s flirtation with a profit recession is out. Swelled by tax savings, earnings growth exploded last year, then slowed and reversed in 2019. Whether and how fast it can be restored has become, predictably, a Wall Street obsession.

One industry whose forecast trajectory makes bulls salivate is tech stocks, in the midst of what is expected to be the worst quarterly profit slump since 2016. For investors who believe in analyst prescience, the subsequent recovery that is forecast for computer and software income is worth watching.

To measure how much faith is built in among different industries, strategists with Bloomberg Intelligence fashioned a model for comparing them. They gathered estimates for a sector’s earnings growth over each of the next four quarters, averaged them and plotted the number against the rate of change in the previous four quarters. Viewed like this, they found tech is one of the few S&P 500 groups where the future looks brighter than the past.

“It’s a rare phenomenon considering that just three other sectors -- utilities, real estate and staples -- have this positive earnings momentum,” said Michael Casper, an analyst at Bloomberg Intelligence, said by phone. “Seven other S&P sectors aren’t looking that great. There is this hope that a turn positive will support tech sector’s levels.”

Profits in the largest S&P 500 industry fell 3% in the first three months of the year, Bloomberg Intelligence data show, and probably dropped 11% in the second quarter. Analysts expect the rate of decline to narrow next quarter to 6.7%. From there, growth is predicted to steadily improve until reaching 17% in the second quarter of 2020. The average next-four-quarter growth rate is 6%, compared with 4.6% in the prior year.

Technology stocks saw the biggest outflow among the S&P 500 sectors last week, data compiled by Bank of America Corp. show. Institutional, retail and hedge fund clients dumped trade-sensitive names ahead of the G-20 meeting in Japan, where Donald Trump and Xi Jinping are scheduled to talk.

The S&P 500 Information Technology Index has advanced 26% this year in the best performance among its industry peers. The rally brought its valuation to 19 times earnings, above the five-year average of 16.7. To strategists at Goldman Sachs, valuation and regulation are two major headwinds for the sector.

“The S&P Info Tech sector carries a valuation premium two standard deviations above its 10-year average across a range of metrics,” strategists including David Kostin said in a note to clients published last week. “Due to the heated political landscape and the rise in U.S. equity market concentration, we expect regulation will remain a persistent headline risk.”

To David Bianco, chief investment officer at Deutsche Asset Management, tech is among the sectors whose per-share earnings will suffer the most should a full-blown trade war materialize.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Chris Nagi, Jeremy Herron

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