Tech’s biggest names will be releasing their earnings reports, and that will certainly sway the markets one direction or the other. It’s a vital earnings report not only due to big tech’s effect on the broad market; it could also set the tone for the new year.
Heading into 2023, there was optimism after a tumultuous 2022 that saw inflation fears put downward pressure on the stock market, especially big tech. Tech’s biggest and brightest downgraded their forecasts for the rest of 2023 amid cost-cutting measures such as reducing their workforces.
As mentioned, it will be a vital earnings season because of the market share size that big tech occupies, especially with respect to the S&P 500. Investors will want to see the market start the new year on a positive note, especially after last year’s confidence-reducing year in risk assets.
“Even after their sharp selloff, the five largest U.S. companies—Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Berkshire Hathaway Inc.—account for 18.9% of the S&P 500,” the Wall Street Journal reported. “That is well above the historical average of about 15%, according to S&P Dow Jones Indices.”
As the WSJ report stated, big tech’s “heavy weighting in the index makes their next round of quarterly earnings especially important because any disappointment could leave the broader market vulnerable to a selloff.” Just to reiterate, whether investors are allocated into big tech or not, their earnings will still have a profound effect on the overall market.
“You care about these earnings even if you don’t care,” said Daniel Morgan, senior portfolio manager at Synovus Trust.
2 Ways to Play Tech Earnings
That said, Direxion Investments has a couple of ways traders can take advantage of the market movements in big tech. If upside occurs, there’s the Direxion Daily Technology Bull 3X ETF (TECL).
If tech companies can show early signs of a turnaround, TECL could be a prime play, but it could take some time for this to happen. If earnings reports and 2023 outlooks are rosy, then TECL could provide traders with a short-term pop.
A sustained bearish outlook on big tech should feed into strength for the Direxion Daily Technology Bear 3X ETF (TECS). TECS seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the daily performance of the Technology Select Sector Index.
Inflation eating corporate profits certainly had a hand in big tech’s weakness in 2022. However, cost-cutting in the form of layoffs could be a way for big tech companies to protect themselves if a recession should strike again as it did in 2008.
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