Big Tech Is Propping Up Stocks. Microsoft and Alphabet Prove It

Big tech stocks – companies have been a bright spot this earnings season, but that’s cold comfort to the broader market.

Microsoft stock is jumping following a cloud-driven revenue beat late Tuesday, and shares of Google parent Alphabet are also ticking up following its report.

Those two firms, which topped lowered expectations, are bolstering the market Wednesday. Just the day before, all three major indexes were pummeled by disappointing earnings that renewed fears about the health of the wider economy

The outperformance of Microsoft and Alphabet highlights the ongoing gulf between big tech and the rest of the market and why concerns about the sustainability of those gains could have repercussions for 2023’s rally.

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Even following Tuesday’s selloff, the tech-heavy Nasdaq Composite is still the clear driver of investors’ gains this year. Since the start of 2023, the Dow Jones Industrial Average is up just over 1%, and the S&P 500 is up some 6%; by contrast, the Nasdaq’s gains are double that, at 12.7% by yesterday’s close.

The fact that Microsoft and Alphabet topped estimates by a double-digit percentage is certainly good news but underscores how dependent this year’s gains have been on a relatively narrow cohort of stocks. While the Nasdaq has easily outpaced the S&P 500, the latter’s 2023 gains are almost entirely thanks to big tech stocks, as well: Half of its top 10 year-to-date performers are tech-related, with its biggest winners, Nvidia and Facebook parent Meta Platforms, each up more than 70%.

Of course, part of that is a function of investors hopping back into some of 2022’s worst-performing stocks, smelling a bargain, as well as unique qualities that have made big tech more attractive in an environment permeated with worries about the financial sector’s strength and inflation-strapped consumers.

Nonetheless, it represents a twofold problem for the market: Overdependence on big tech’s gains has done little to provide assurance about the health of the wider economy, and it leaves investors especially vulnerable if tech should stumble again.

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Concerns about the first point flared Tuesday. Although worries about a recession have faded, they certainly haven’t disappeared, particularly after warnings about a consumer pullback and slowing economy from the likes of United Parcel Service (UPS).

That could be a signal that we’re nearing a limit to Americans’ ability to handle inflation. As Navellier founder Louis Navellier writes, UPS’ commentary comes as the market is seeing “consumer-facing companies raising prices to offset their own cost increases, and signs that consumers are pushing back.”

As for the strength of tech itself, that too might not be as solid as some investors would hope. Wolfe Research’s Chris Senyek notes that ongoing layoffs at big tech boost near-term numbers but “likely signal a weakening intermediate-term demand outlook.”

In addition, some results have also been helped by bookkeeping shifts, like changing depreciation schedules and stock-based compensation timing, he notes, rather than more bullish signals like strong end-market demand.

Likewise, UBS Global Wealth Management Chief Investment Officer Mark Haefele argues that tech beats probably can’t provide a basis for a sustainable rally, given high valuations and ongoing recession fears keeping a lid on market enthusiasm.

Of course earnings season is rolling on, and other big tech firms, like Apple and Amazon.com, have yet to report. If they also beat expectations, their results may provide further bright spots in an uncertain time, while further concentrating the market’s gains among a small group of winners.