Big Tech backs stock gains with solid results, growth prospects

Big technology companies provided the energy for most of broader market's sharp ascent in 2023 and their latest financial reports so far justify that confidence from investors.

Microsoft and Google's parent company Alphabet reported strong profit growth that beat analysts' forecasts. Chipmaker Intel surprised Wall Street with a profit during its most recent quarter. ServiceNow, which makes software that automates technology operations, reported a surge in profit.

Tech's propping up of the market had raised concerns that the gains could be on somewhat shaky ground if companies couldn't deliver actual results. A big part of the S&P 500 breaking free of a bear market in 2023, despite lingering concerns about a recession, was due mainly to a runup in various tech stocks.

"In a nutshell, Big Tech earnings have been a flex the muscles moment for the bulls," said Daniel Ives, a senior equity research analyst at Wedbush, in a research report.

He said artificial intelligence advancements will be a key reason for tech stocks to keep rising this year. The information technology and communications sectors are each up more than 40% this year already.

"We continue to strongly believe a new tech bull market has started this year," Ives wrote.

Microsoft is up more than 40% this year and its size gives it more influence on the broad S&P 500 index, which is up more than 20% in 2023. More importantly, many big tech companies have been giving Wall Street positive signals that there is more growth ahead with the development and integration of artificial intelligence and cloud computing in technology with broad uses.

Advertising spending has rebounded from its slump as inflation cools and fears about a potential recession ease.

Wall Street has taken notice. Analysts polled by FactSet expect rising profit growth for Alphabet and Meta Platforms, Facebook's parent. Microsoft is expected to follow its big profit increase in the second quarter with solid growth through the second half of the year.

"We are in a period of incredible innovation in search," Alphabet CEO Sundar Pichai said during the company's most recent earnings conference call.

Artificial intelligence is viewed as the big driver for growth for many tech stocks, which could keep leading the market higher through the year.

Other measures for earnings growth within the tech sector have also been flashing green this year. The price-to-earnings ratio, which considers the cost of a stock relative to a company's earnings, has been growing throughout the year for the broader tech sector. A higher ratio means Wall Street expects higher growth rates and the measure for the broader sector hit its highest level in the last two decades as of June.