Big Tech: Powell has put pep back in their step

Tech stocks apparently just needed the combination therapy of job cuts and Jay Powell.

On Thursday afternoon, Big Tech’s earnings season concluded with fourth-quarter numbers for Apple, Alphabet and Amazon. The numbers were uninspiring. Apple recorded its first quarterly revenue drop in nearly four years following supply chain challenges in China. Alphabet’s advertising business showed further signs of slowing. So did Amazon’s cloud computing unit.

But so far in 2023 shares of Apple, Alphabet, Amazon, Microsoft, Meta, and Netflix have soared between 10 and 57 per cent. Apple aside, the rest have typically cut about 10 per cent of jobs to show Wall Street some cursory commitment to cost control. Even so, headcount exceeds 2019 levels for these giants.

More importantly, moderating inflation figures have encouraged hopes that the Fed’s tightening cycle will soon be over. That has prompted investors to pile back into growth companies after the 2022 rout. The enthusiasm may be overdone. It is unclear that the acceleration of prices has been vanquished for good. With rates to stay well above zero where they hovered for a decade, steady-state valuations must retreat from 2021 levels regardless.

In 2022, the shares of Facebook owner Meta fell by almost two-thirds, driven by Mark Zuckerberg’s insistence on spending tens of billions on his vision for the metaverse. Earlier this week, after showing proper contrition and announcing a $40bn stock buyback, shares rose by more than a fifth. They are up nearly 60 per cent for the year. Still, the consensus forward 12 months earnings estimate for Meta remains down 36 per cent from the end of 2021.

As such, Meta’s price/earnings multiple of 22 times is not far off the 25 times it hit at the end of 2021. That snapback is far sharper than the rest of Big Tech.

Tech stock prices are only modestly cheaper than in the heady days of the pandemic. Investors should note that redundancies and a bounce related to monetary policy are one-off phenomena.