Tech shares could retake market reins as earnings heat up By Reuters

By Lewis Krauskopf

NEW YORK (Reuters) – A bevy of major U.S. earnings reports next week led by Apple (NASDAQ:), Microsoft (NASDAQ:) and Facebook (NASDAQ:) could help technology and growth stocks reassert their dominance after a recent run by banks, energy and other potential beneficiaries of an economic reopening.

After leading markets higher for most of 2020, technology-related stocks took a backseat late last year to so-called value or cyclical plays, whose businesses are expected to gain the most from the economic revival promised by vaccines against COVID-19.

That shift has stalled in recent days as investors weighed lackluster outlooks from big banks and a blockbuster quarterly report from Netflix (NASDAQ:) that lifted its shares by 17%. The Russell 1000 growth index was up 3.3% in the past week as of Friday morning, while its value counterpart fell 1.5%.

Next week’s crop of fourth-quarter results – with about a quarter of the reporting – could help determine whether the resurgence in growth stocks will continue, potentially threatening the recent rally in value and cyclical shares, said Chuck Carlson, chief executive officer at Horizon Investment Services.

“That is probably going to be the story of earnings season,” he said. “What will earnings mean in terms of the sustainability of this rotation that has occurred in the last eight, nine weeks.”

Steady growth and resilience in the face of the coronavirus pandemic made technology stocks desirable to investors, who poured money into the sector as widespread lockdowns devastated swaths of the U.S. economy.

But a resumption in tech outperformance could also revive concerns over investor crowding into popular names. The biggest five technology-related companies account for about 22% of the weight of the S&P 500.

Aside from Apple and Microsoft, other tech sector companies due to report next week include payment processing firms Visa (NYSE:) and Mastercard (NYSE:) and semiconductor company Advanced Micro Devices (NASDAQ:). Tesla (NASDAQ:), whose explosive share price turned the electric car maker into one of the world’s most valuable companies, reports on Wednesday.

So far, corporate profits have been strong across the board: Of 66 S&P 500 companies that have reported earnings, 87.9% have beaten Wall Street estimates, well above the long-term average of 65%, according to IBES data from Refinitiv.

Investors are particularly watching corporate outlooks, given the expectation of an economic rebound this year. Earnings are expected to rise 23.7% this year after falling 14.1% in 2020, according to Refinitiv.

While the tech sector’s earnings held up relatively well in 2020, its expected profit growth of 14% in 2021 is below the S&P 500 overall and lags areas such as financials, industrials and materials. “The risk…