‘When do things start looking good again?’

As Big Tech’s next earnings cycle approaches, the sector is stuck between a rock and a hard place.

On one hand, some tech stocks have rallied in recent weeks, as the Street positively responds to cost-cutting efforts at companies like Meta (META). On the other hand, near-term, there’s still a sense that tech is a little unsteady, with the industry entrapped in a game of macroeconomic whack-a-mole.

“There are still so many questions as to where the bottom really is,” said Bernstein Analyst Mark Shmulik. “When do things start looking good again? I don’t think anyone is expecting great numbers this quarter, but they’re definitely looking at guidance for next quarter and this year.”

By looking at the markets, you wouldn’t even know that tech companies are coming off a historically difficult year for the sector.

In 2023 so far, tech stocks have rallied, even sending the Nasdaq 100 (^NDX) barreling into a new bull market, Yahoo Finance’s Jared Blikre pointed out just a few weeks ago. As of this afternoon, Apple (AAPL) is up about 29% year-to-date and Meta’s shot up roughly 73% year-to-date, while chipmaker Nvidia (NVDA) — the biggest winner of all — has seen its shares climb approximately 87% in these first months of 2023.

“Tech is on pins and needles right now,” said Wells Fargo Analyst Michael Turrin.

“The stocks have moved up, but the fundamentals don’t suggest we’re all the way out of the woods yet. Right now, the question is, ‘Have we turned the corner’? Was there more conservatism in guidance to start this year?’ If so, maybe we can get back to normal ….There’s going to be a lot of careful attention to what management teams say about the macro.”

However, market-spanning tech optimism is in some ways more about the Federal Reserve than it is about tech itself – which creates a precarious situation in which hopes could bump into a tougher-than-expected reality.

Fed-willing, ‘tech is just going to rip’

Tech was slammed by rising interest rates in 2022, and there’s certainly the idea that we’re seeing the light at the end of the rate-hike tunnel. But whether or not we’re at the end of the rate cycle, all tech companies are trapped in it right now.

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Though more mature tech companies, like Alphabet (GOOG, GOOGL), will be less jarred by Fed Chair Jerome Powell’s next moves, the sector’s priorities and narratives will be dictated by what the Fed does next, said Andrew Boone, analyst at Citizens-owned JMP Securities.

“If Powell starts to pause rates, or if we’re one hike away, all those tech stocks start to work,” he said. “At the end of the day I feel like we’re still in this macro cycle. If Powell continues to tighten, focus will stay on profitability. However, if rate hikes slow and we’re at the end of the tightening cycle, tech is just going to rip.”

In recent months, profitability concerns have been center stage for tech. To Boone, one of tech’s biggest outstanding questions is how much companies have truly saved from the waves of layoffs they’ve been conducting over the last six to eight months. The reduction of headcount costs should materially improve companies’ bottom lines – the question is just by how much.

“We’re actually going to start to see that money that’s been saved from these layoffs,” said Boone. “We’re actually going to see the numbers behind the cost discipline story, and that’s going to be one of the drivers of stock performance over the next six weeks.”

Key areas to watch

As the earnings calls start coming in, there are three additional key areas to keep an eye on – what companies say about the digital advertising and cloud slowdowns, and how they talk about AI, said Bernstein’s Shmulik.

“Digital advertising is a big theme, as is cloud,” he told Yahoo Finance. “People are comfortable with digital advertising bottoming out, but are less so with cloud. The question for both is: ‘How bad do the numbers get?’ Digital ad numbers seem to be in a rut but holding, and people expect the entire sector to recover. We’re not quite there for cloud, though, because the numbers keep going down.”

This cloud slowdown could be existential for companies that have relied on long relied cloud growth to bolster their businesses across the board, like Amazon (AMZN).

“There’s no safety to point to on Amazon, which is why the stakes are so high,” Shmulik added.

As the AI hype cycle keeps building, Boone, Shmulik, and Turrin think AI talk will feature prominently in earnings calls this season. But for now, a lot of what we’ll hear is just that – talk.

“Most investors I speak to don’t have conviction that things have really changed a lot,” said Turrin. “AI has been really encouraging because it allows us to think about the future. Stocks have moved up on this AI theme, but that’s not likely to right now move the needle in the immediate term.”

But AI’s another moving target in a sector where, all in all, the vibe’s been rather topsy turvy.

“The mood has been that Meta is finally figuring out a lot of stuff, while we all of a sudden have questions about Google,” said Shmulik. “Some of those questions are about this quarter or this year, but I’ve already started to get a lot of questions from investors about 2024.”

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.

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