Wall Street's run-up to record highs will be put to the test in the coming weeks as heavily weighted U.S. technology-related companies open their books on the final quarter of 2023.
The advance in the S&P 500 (.SPX), which posted a second straight all-time high close on Monday, has been driven in part by a rally in chipmakers and other top tech shares amid optimism around artificial intelligence.
The S&P 500 rose 24% in 2023, while the tech-heavy Nasdaq (.IXIC) gained 43%.
Fourth-quarter earnings for S&P 500 companies overall are expected to have increased 4.5% from a year earlier, LSEG data showed on Friday, with a 49% year-over-year earnings gain expected in the index's communication services sector (.SPLRCL), a 17% increase expected in information technology (.SPLRCT) and a 23% gain seen in the consumer discretionary sector (.SPLRCD).
Strategists said results from the "Magnificent 7" group of megacap companies - Apple (AAPL.O), Microsoft (MSFT.O), Alphabet (GOOGL.O), Amazon.com (AMZN.O), Nvidia (NVDA.O), Meta Platforms (META.O), and Tesla (TSLA.O), along with other large tech-related companies will be key to the outlook for earnings and the market this year.
"Considering the market surge was centered on big tech... much is expected from them," said Quincy Krosby, chief global strategist, LPL Financial in Charlotte, North Carolina.
Valuations are "rich by any measure," she said. The S&P 500 is trading at 19.7 times forward 12-month earnings estimates, well above its long-term average of 15.6 times, based on LSEG Datastream data.
Analysts expect S&P 500 earnings to rise by 11% in 2024 after increasing just 2.8% in 2023, LSEG data showed.
With the market overall already at record highs, it may have a tough time rallying from here, Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management, wrote in a note on Monday.
"With forward multiples already at historic peaks and earnings forecasts for 12 months forward ambitious, equity market gains may stall in 2024, as better earnings are met with lower valuation multiples characteristic of a midcycle or soft-landing environment," she wrote.
CHIPMAKERS IN FOCUS
Wall Street's rally has also been helped by expectations that the Federal Reserve will cut interest rates in the coming months, which would mean lower costs for businesses and consumers. That tends to help tech companies without long earnings histories.
Chipmakers could be in focus this earnings season, with the group rallying after Taiwan Semiconductor Manufacturing Company (2330.TW), the world's largest contract chipmaker, said last week it saw strong demand for high-end chips used in AI.
An index of semiconductors (.SOX), which jumped 65% last year, has also hit record highs recently.
Results are due this week from Netflix (NFLX.O) late on Tuesday, Tesla (TSLA.O) on Wednesday, and chipmaker Intel (INTC.O) on Thursday.
Next week brings results from Microsoft and Alphabet, both due on Jan. 30, while Apple, Meta Platforms and Amazon.com are expected to report results on Feb. 1. Nvidia, the world's most valuable chipmaker, is due to report later in February.
On Jan. 8, Nvidia, viewed as the leading supplier of processors used in AI computing, unveiled new desktop graphics processors taking advantage of AI. Its stock has been hitting record highs and is up more than 20% so far this year.
The Magnificent 7 stocks accounted for about 62% of the S&P 500's total return in 2023, according to S&P Dow Jones Indices.
Despite the big gains, optimism over technology stocks and AI remain strong, some investors said.
"Technology stocks continue to power the market to levels that seem to just generate even more interest," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.
