The longevity of the technology stocks rally is on the line next week as Netflix Inc (NFLX.O) kicks off the earnings season for a sector that has mushroomed to account for more than a fifth of the U.S. stock market’s value.
SAN FRANCISCO The longevity of the technology stocks rally is on the line next week as Netflix Inc (NFLX.O) kicks off the earnings season for a sector that has mushroomed to account for more than a fifth of the U.S. stock market’s value.
Surges in Apple (AAPL.O), Facebook (FB.O) and other Silicon Valley heavyweights have pushed the S&P 500 technology index 10 percent higher this year, more than double the broader S&P 500 index’s 4 percent gain. The tech sector’s aggregate value now tops $4.4 trillion, 30 percent higher than No. 2 financials, and even rivals the size of the Federal Reserve’s massive balance sheet.
The next test for these companies is whether their profit growth is sufficient to justify their outsized share price gains.
Enter Netflix, which reports after the bell on Monday. The video streaming pioneer is expected by analysts to quintuple its earnings per share. But with its stock surging 43 percent in the past six months and now trading at 109 times expected earnings, Netflix’s valuation is based more on sentiment than on fundamentals, many investors believe.
“The market’s reaction to whatever the news is from Netflix will be telling,” said Stephen Massocca, Senior Vice President at Wedbush Securities in San Francisco. “If the slightest little negative leads to a 15-point decline, that tells you things are elevated and the market is only going to reward the most excellent of news.”
Momentum in many tech stocks has been driven by ambitious expectations for earnings. Tech profits are seen climbing 14.7 percent for the first quarter, according to Thomson Reuters I/B/E/S. That would account for nearly a third of the 10.4 percent earnings growth predicted across the S&P 500.
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