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Tech’s Ferocious Rally Raises Bar for Earnings as Red Flags Wave

(Bloomberg) — US tech shares are trouncing a broad market rally to start the year, a source of concern for some traders bracing for the sector’s worst earnings slump since 2016.

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The Nasdaq 100 Stock Index surged as much as 2.6% Monday as investors turned a blind eye to the risk of a US recession and loaded up on stocks that were among last year’s biggest losers. The tech-heavy benchmark is on pace for its best month since July. It’s gained nearly 9% in January, about double the gain in the S&P 500 Index.

The furious rally is coming even as profit estimates are declining and as Federal Reserve officials advocate for more policy tightening to combat inflation, pushing up long-term borrowing costs in the sort of toxic backdrop that undermined the shares in 2022. The rubber is about to hit the road on Tuesday, when technology earnings kick off with Microsoft Corp. and chipmaker Texas Instruments Inc. reporting after markets close.

“People are getting giddy about the market again,” said Michael Matousek, head trader at US Global Investors. “There’s a sense that the negative news is already out there and that the upside is now here. That means that if we see some bad misses this season, we could be in store for a lot of disappointment.”

Strength in tech was on display nearly everywhere on Monday after reports that Microsoft is investing $10 billion in ChatGPT maker OpenAI, while activist Elliott Investment Management took a multibillion dollar position in Salesforce Inc. The Philadelphia semiconductor index surged about 5%, led by Advanced Micro Devices Inc. and Qualcomm Inc. Apple Inc. gained as much as 4%, while Tesla Inc. surged as much as 9%.

The strength comes in the wake of announcements of thousands of job cuts across the tech sector as the companies gird for the risk of weaker economic growth. So far, investors are taking the dismissals as a net positive that would help prop up slumping margins.

Microsoft, which began slashing 10,000 jobs last week, is expected to report its slowest quarterly revenue growth since 2017. Wall Street is focused on the outlook for spending by businesses as well as cloud-computing services.

Bank of America Corp. strategists are among those warning the cost-saving measures don’t bode well for growth.

“This presages waning tech demand, suggesting that forward sales are likely to be lower,” strategists including Savita Subramanian wrote in a note to clients on Jan. 22.

Michael Wilson, chief US equity strategist at Morgan Stanley, expects technology stocks to face pressure.

Last year’s underperformance was “the mirror image of what we’ve experienced in the last seven years,” he said on Bloomberg Television on Monday. “To think that that’s all completed now I think would be naive.”

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