The NASDAQ Composite is within 200 points of the all-time highs it set last summer, at the time of writing. So far this year the NASDAQ has jumped more than 20% off the lows from late 2018, and it looks like it could keep rising.
While forward-looking valuations are more or less in-line with historical norms (around 17x forward earnings), some of the biggest names on the NASDAQ aren’t logging new highs.
Tech Companies like Apple, NVDIA and Samsung (not listed on the NASDAQ, but a huge tech name) are lagging the broad index, which is the exact opposite of the market action that took the NASDAQ to last year’s highs. There may be widespread weakness in the sector, which seems like a fundamental challenge for a bull market that is nearly a decade old.
Earnings season is here, and many of the Q1 earnings estimates put equities’ recent sustained strength in a very curious light. Most analysts think that Q1 earnings will be rough, but few are willing to concede that 2019 could be a year of falling revenues and rising insecurity.
The NASDAQ isn’t a Bubble…Maybe…
Things have been good for equity investors for a long time. If the NASDAQ is able to surmount the highs it set last year around 8133, it will mark yet another leg higher in the longest sustained equity bull market in US history.
This whole thing was started when central banks pumped the gas in the wake of 2008’s encounter with the abyss. It has been a non-stop ride higher for equity investors ever since, though a free-money fueled stock market boom might seem a bit artificial to some.
Until late summer of 2018, everything in the tech world seemed normal enough. The NASDAQ was being led higher by a hand full of tech companies with enormous valuations. The FAANG stocks, named by Jim Cramer some time ago, were market darlings.
At its peak last year Apple (one of the ‘A’s) had a market cap of more than 1 trillion USD. Not too shabby for a smartphone maker that also markets expensive smartwatches and computers that practically no one can afford. This is all happening at a time when numerous macro issues are popping up, like the situation with Brexit, or ongoing consumer weakness globally.
More: What is the NASDAQ?
Trouble in Tech Paradise
Needless to say, the good times seemed to come to an end in October of 2018.
Between September 24 and December 17 of last year, the NASDAQ Composite fell from 8046 to a low of 6333 (rounded closing numbers). All of the flagship companies tanked right along with the index and ended last year lower by double-digit percentages.
At the time many blamed central bank tightening for the markets’ steep fall. Central banks backed off from their move to ‘normalize’ monetary conditions over the first two months of this year, which may be part of the reason why equity markets have bounced back with a vengeance.
The Moment of Truth, Sort Of
There is little doubt that tech majors like Apple and Samsung will see a big drop in Q1 earnings. In theory that should mean falling share prices, but the market might not care about falling earnings for a few reasons.
This article doesn’t take a position on which way mega-cap tech will trade, nor if the NASDAQ Composite is going to rally into new all-time highs. It could go either way. One of the biggest things that may support equity prices, even in an environment of falling financial performance, is the expectation of more easy central bank money right around the corner.
There is little doubt that the major central banks are going to have to loosen up their balance sheets again, which could be a big driver for multiple expansion (the market’s willingness to pay more for the same, or less, earnings). Most of the major tech names don’t start to release earnings until the end of April, which is when we will see if earnings matter anymore to tech investors.
Apple is still one of the biggest companies in the world, with a market cap of nearly $950 billion USD at the time of writing. It’s shares traded above $225 last summer, before falling to under $150 in the space of a few months.
Analysts see Apple earnings dropping by 14% for the beginning of Q2, which would put them at $2.36 a share. More importantly, Apple’s revenue is expected to drop by 6%, and come in at $57.38 billion for the quarter.
Clearly, none of this is good news. The other issue is that Apple shares are still hanging around near $200 USD, while the NASDAQ Composite flirts with all-time highs. At $200 USD a share, Apple remains more than 10% below the highs it hit last summer.
When the former leaders of a massive rally rotate into a following role, it is time to take a hard look at what could keep this rally going.
As mentioned above, Samsung isn’t listed on the NASDAQ. It is being included in this because it is one of the world’s largest consumer technology firms, and has a business model that is very similar to Apple’s.
The revenue numbers that Samsung will post later this month sound pretty bad, but it is important to remember that Samsung’s Q1 2018 revenue was great, and their Q1 2018 profit was the highest on record.
Samsung guided that Q1 revenue will come in around 15% lower than last year, at approximately $45 billion USD. Profit is expected to fall as much as 60% from a year earlier.
You read that right, profits are expected to be 60% lower
The company cites slowing growth as one of the main factors that is slamming profits lower, which may not be isolated to Samsung.
The same pattern that we see in Apple’s chart seems to be present in Samsung’s stock as well. While Samsung’s shares have risen from their late 2018 lows, they have yet to reclaim the highs they printed last summer.
It would be hard to imagine that a broad-based tech rally would continue without the participation of companies like Samsung and Apple (ok, you got me, there aren’t many companies like Samsung and Apple!).
Nvidia Faces Declining Earnings, Revenue
Nvidia is highly leveraged to growth in the technology sector, as it manufactures numerous components that other companies use. The company is expected to report earnings of $0.82 cents a share this quarter, which would represent a drop of 60% compared to the same quarter last year. Revenue is also expected to drop by more than 30%.
Like just about everything else, Nvidia shares have rallied hard off the lows they printed near the end of 2018. Just like Apple and Samsung shares, Nvidia has failed to reclaim the highs from late last summer, which is a very curious situation.
It would be hard to believe that there was a good fundamental market for tech, given the expected fall in Nvidia’s revenue and earnings. Unlike a company like Apple, Nvidia sells to a wide range of clients. Having a diverse customer base insulates it from brand-specific woes, but when its earnings fall, it may be a warning of bigger problems ahead.
Hot IPO’s Drop
Lyft isn’t a tech company in the same way that Nvidia or Samsung is, but its recent IPO is a good barometer of how the market sees risk. Lyft is one of a few hot new companies that planned to go public this year. The Lyft IPO was lackluster, and the shares have been pummeled on the exchange.
Dan Ives, an analyst at Wedbush Securities, said that the Lyft IPO was a, “major gut check time for Lyft and the tech IPO world to see how this stock trades given it was the first one out of the box.”
While not a total disaster for the money-losing ride-sharing firm, the Lyft IPO wasn’t exactly encouraging to other tech companies like Pinterest, who is now reconsidering the scope of its upcoming IPO.
This May be the Top for Tech or Just the Beginning of the End
When established tech names like Apple and Samsung stop participating in one of the biggest equity market bounces in recent history, it is time to take notice. There is nothing to say that the NASDAQ can’t go higher. In fact, the buying momentum that it has behind the index may propel it to new highs in the coming months.
With that said, it would be almost impossible for the NASDAQ, or any of the other major global indices to tack on another 15% in gains without a major improvement in the underlying economy. There are numerous pitfalls for equities, such as the trade situation between the US and China, as well as a steadily rising oil price.
It probably isn’t wise to short a market like the NASDAQ, but if you are planning on buying this rally, keep your stops tight. When this rally falls apart, it could drop faster than many imagine right now.