Chart of the Week: Tech Profit Growth Estimates On the Rise

March 11, 2022

Technology stocks buy

Forget about the market angst. Technology profit growth estimates continue to increase following a stellar fourth quarter earnings season.

According to Bloomberg data, 87% of the sector has beaten profit estimates. It is not as good as the 92% showing in the third quarter but it is still better than the rest of the sectors in the S&P 500.

While Wall Street remains optimistic of the technology sector’s profits in 2022 (see chart below), it does very little to lift the tech stocks out of their slump amid fears of the faster-than-anticipated Federal Reserve (Fed) rate hikes as well as the uncertainties of rising geopolitical tensions.

Structural growth story for tech stocks remains relevant

The optimism on tech stocks earnings is not a surprise given that the structural growth story for the sector remains relevant even in a rising interest rate environment.

The rollout of 5G network over the next few years will spur a shift towards automation and will accelerate the digitalisation of our manufacturing process.

While the technology infrastructure was not as ready in the past, the faster internet speed will transform some of the industry.

In fact, we are already seeing some of this shift. Some of these trends were accelerated by the COVID-19 pandemic.

For example, the introduction of remote working, cloud computing, e-commerce push and even the Metaverse.

While some of these themes will not materialise, I think we are at a crossroad of transitioning into a new phase and 5G will enable these transitions.

I think it will probably be similar to when Steve Jobs introduced the Apple’s iPhone. The rise of the smartphone industry.

It is still too early to gauge the ultimate winners in this shift but most of the leading tech stock players will remain as part of this new ecosystem that we are moving into.

Buying Opportunity for Long-term Investors

While it is easy to join the panic crowd, I think the sell down in tech stocks provides a good buying opportunity for long-term investors.

The disconnect between the falling share prices and rising profit expectations point to the level of anxiety in the market and long-term investors should take advantage of this volatility to position their portfolio.

Honestly, I think it is close to impossible to predict how the stock market will perform over the next three to six months given the uncertainties that we are currently facing.

While tech stocks are still in a rocky spot amid the looming rate hikes given the surge in inflation, I think the fundamentals of tech stocks are still good given the structural growth story.

The good thing is that most Wall Street analysts also think the same way. That means the current volatility in the market has more to do with the fear over how investors will react with the rising interest rate environment.

The big question you should ask yourself is, “If you’re not buying now, then when?”

Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.

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