After a terrible 2022, technology stocks are off to a good start. The new year's rise is about to face its first significant test.

After a terrible 2022, technology stocks are off to a good start. The new year's rise is about to face its first significant test.

The five largest U.S. corporations—Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., and Berkshire Hathaway Inc.—account for 18.9% of the S&P 500 even after their severe selloff. According to S&P Dow Jones Indices, that is much more than the historical average of around 15%.

Due to the firms' significant weight in the index, the upcoming round of quarterly earnings is extremely crucial since any failure might expose the entire market to a selloff. On Tuesday afternoon, Microsoft declared sales of $52.7 billion and a net income of $16.4 billion; the other firms will do the same in February.

There aren't many hopes for the group. Microsoft's sales increased by 2% while its profit decreased by 12% from the prior year. In the most recent quarter, analysts predict sales growth of just 2% on average at the other three biggest tech companies, including a 1% fall at Apple. According to FactSet, all three corporations are expected to have a 39% average fall in profits.

The pandemic drove a sales surge in a variety of products, including cloud computing contracts and iPhones, which drove up stock values. Giant companies in Silicon Valley hurried to employ enough people to meet the soaring demand.

However, when the Federal Reserve started its drive to tighten monetary policy last year, the situation changed. Just as the boom of the pandemic period drew to an end, concerns about a potential recession have increased. Now, the possibility of stricter controls also looms large.

Michael Walker, portfolio manager at AllianceBernstein, said "In this sort of climate, corporations are attempting to control expenditures, so some IT spending is likely to be reined in." Shares of Amazon and Microsoft are held by his fund.

After head counts grew due to the pandemic boom, IT businesses are drastically reducing their workforce. Alphabet said last week that it will be making its biggest-ever round of layoffs, 12,000 employees. Microsoft said this week that it will be laying off 10,000 employees, the most since 2008. Thousands of positions are also being cut at Facebook's parent company Meta Platforms Inc. and Amazon.com. The voices of the executives are becoming gloomier.

This year's early results are promising. The price of Alphabet has increased by 11%, while Amazon and Meta have increased by 15% and 19%, respectively. Microsoft stock is up roughly 1%, while Apple has increased by 9.7%. Despite the current rebound, those stocks are still well behind their record highs.

The industry has profited from expectations that the Fed would shortly change its tightening policy. Recently, the yield on the 10-year Treasury reached its lowest point since September. When bond rates are low, tech stocks have typically done well.

Moreover, the dollar has recently lost significant ground after last year's strong currency hurt businesses with significant international operations.

In a more challenging operating environment, the heavy weighting of tech companies poses a new danger to index funds, according to Ryan Grabinski, an investment strategist at Strategas Research Partners. Since their shares of profits and market value had matched for years, "those top stocks have been bearing their earnings weight."

At the end of 2022, the technology sector would make up 26% of the S&P 500's market value, but it would have only generated 21% of earnings.

According to Grabinski, there is a possibility that some of these business lines won't continue to generate the same level of revenue.

As the start of the tech earnings season has been promising, shares of Netflix increased last week because of earnings that exceeded Wall Street analysts' expectations. The business surpassed its own predictions for membership growth and announced it will tighten down on password sharing and introduce an ad-supported option.

Plus, following the sharp selloff, tech stocks appear more appealing.

The business downturn is still viewed by bulls as a temporary issue for an otherwise promising investment.

Earnings expected by the Tech Giants:

Wednesday, February 1, 2023:

• Meta Platforms (NAS: META) - $2.24 on revenue of $31.5bn

Thursday, February 2, 2023:

• Apple (NAS: AAPL) - $1.95 on revenue of $122.5bn
• Alphabet (NAS: GOOG) - $1.18 on revenue of $76.6bn
• Amazon.com (NAS: AMZN) - $0.18 on revenue of $145.7bn

Worth Noting:

This week, the Nasdaq 100 index broke above a crucial bearish trendline barrier, indicating an upward shift in sentiment. Hence, the outcome from the earnings figures from these tech giants, will have a major influence on the sentiment.

(WSJ.com, CNBC.com, NASDAQ.com)