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As companies are reporting flat fourth quarter earnings and forward guidance so far, tech stocks (NYSEARCA:XLK) are at risk of de-rating if the costly capital investments do not yield high earnings or boost productivity in the upcoming quarters, according to JPMorgan’s Global Asset Allocation report, published on Monday.
So far, 6% of companies have reported -- mostly banks (KBE), some consumer (XLP), (XLY) and Industrial (XLI) companies. Of those, 66% are beating earnings, but the quality of those earnings “is questionable,” JPMorgan analysts said, as only 50% are beating on revenues and their stocks are underperforming after reporting.
Banks have reported mixed fourth quarter results with weak investment banking revenues, “sharper-than-expected normalization in net interest income and rising charge-offs -- such as credit card, autos, commercial real estate -- which was partially offset by expense management,” analysts added.
For consumer companies, “we expect corporates to address diminishing household savings and liquidity and the bifurcation in spending patterns between lower and higher income,” analysts said. In addition, the decelerating growth in China is still a risk for global consumer brands.
But when it comes to tech stock (XLK), especially those tied to artificial intelligence, the high cost of capital investments could become a headwind if those investments do not yield the desired results in the next quarters. Stocks are at risk of re-rating, analysts said, and “over the last year, just about everything tied to the AI theme re-rated.”
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