Big Tech stocks are bouncing back in 2023. Now they face their first big test

Published Tue, Jan 24 202310:37 AM ESTUpdated Tue, Jan 24 202311:17 AM EST

After a soul-crushing 2022 , the once-booming technology sector appears poised for a comeback in the new year. Big names in the sector are already off to a solid start, with shares of Amazon and Meta Platforms up more than 16% each in 2023. Alphabet and Netflix have surged more than 13% and 21%, respectively. META YTD mountain Shares of Meta Platforms have surged more than 19% since the start of 2023 But earnings season will test the sustainability of these recent rallies and runs, and indicate whether there's evidence to support those surges or if Big Tech is in just another bear run waiting to lose steam. The season kicks into full gear Tuesday with results from Microsoft . "This is the first real test we've had in a while for Big Tech stocks," said Adam Sarhan, CEO of 50 Park Investments. "We've known for a while that the Fed wants inflation to go down. In order to do that, they have to raise rates. The missing link now has been slower economic activity." Tech companies have already demonstrated that they are bracing for slower growth with a string of recent cost-cutting announcements and layoffs that have left few stalwarts untouched. Alphabet said Friday it's slashing 12,000 jobs , while Salesforce announced earlier this month that it would cut 10% of its staff . On Monday, Spotify joined the trend, announcing plans to reduce its workforce by 6% along with the departure of its content chief . Slashed bonuses are becoming another indicator of tougher times. For tech, a seemingly endless expansion period came to a stuttering halt when the Federal Reserve began its hiking and recession fears mounted. With the economy now weakening, companies such as Alphabet face an advertising slowdown, Amazon is grappling with tighter consumer budgets and Microsoft is feeling the effects of lower IT spending. All in all, what companies relay in their outlooks — including whether they cut estimates and by how much — will signal what obstacles remain ahead. Only then will investors have a better sense of whether difficult times have in fact passed. Sarhan expects most technology companies to surpass expectations, in part because estimates have come down so much. A miss, therefore, would signal even more trouble in 2023, he said. One exception is Netflix, which surged last week after an earnings miss . That's because subscriber growth outshined that shortfall, signaling to investors that there will be more customers — and more earnings — in the future, Sarhan said. Some analysts remain optimistic heading into earnings season, viewing this period as a potential reset for dismal expectations. That includes Wells Fargo analyst Michael Turrin, who expects Microsoft's report Tuesday will "put the worst news behind us" and provide a much needed "reset" for expectations. "While FQ2 looks likely to be a noisier qtr, our work suggests MSFT will see stabilizing results through the 2H and thereafter, presenting a more compelling entry point on shares," he said in a note Monday to clients. Companies often use this earnings season as an opportunity to guide for the year ahead. Paul Meeks, portfolio manager at Independent Solutions Wealth Management, wants companies to realistically guide for a recession, which he views as likely within the next several months. Preparing investors for the worst with lowball guidance may also set technology stocks up for an upside surprise in the aftermath, he said. "I'm not necessarily worried about what they say for the quarter just ended; that's a rearview mirror," he said. "I'd just like people to say honestly, 'I don't know, so we're planning for the worst.'"