Investors are braced for a bout of volatility in US technology stocks over the next month, underlining the high stakes for this year’s best performing sector as second-quarter earnings kicks into gear this week.
Equity and bond markets have been tranquil in 2017, unnerving some money managers who are concerned about geopolitical tensions, tighter monetary policy, lofty valuations and whether the global economic recovery will endure.
Expectations for volatility on the Nasdaq 100 — an index that is heavily weighted towards stocks such as Apple, Alphabet, Facebook and Microsoft — have exploded in recent weeks, according to Mandy Xu, a derivatives strategist at Credit Suisse.
That, in turn, pushed the gap between the implied volatility on the Nasdaq 100 and that of the broader, benchmark S&P 500 earlier this month to a level exceeded only once over the past decade, FT calculations based on CBOE data show. While the spread between the two has eased in recent days, it remains more than three times the average of the last decade.
The ratcheting higher in expected volatility has been sparked by a “notable increase in demand for protection” among investors, Ms Xu said.
The S&P 500 technology index has surged by a fifth this year, adding some $850bn in market value, as Facebook, Amazon, and Oracle, have all soared. In one sign of the sector’s resilience, it bounced back sharply after wobbles in June.
However, the rally has pushed valuations higher, with the S&P 500 tech index climbing to 18.9 times expected earnings over the next year, from 16.9 times a year ago, according to S&P Global Market Intelligence data.
That leaves US’s largest technology groups under pressure to at least meet the lofty expectations Wall Street analysts have set for second-quarter earnings. The sector is expected to deliver an 11 per cent jump in profits from a year ago, according to FactSet, which would be the third straight quarter of double-digit gains and the biggest advance of any industry barring the recuperating energy sector.
Microsoft, Netflix, Visa and IBM will give investors a taste of what to expect when they unveil their results this week. One in every five companies listed on the S&P 500 is scheduled to report over the next five days.
The fall in the share price on Friday of JPMorgan Chase, Wells Fargo and Citigroup even after the trio unveiled stronger than expected results is a cautionary tale of investors’ elevated expectations. “The risk is that [equities] prices largely reflect lofty earnings estimates, leaving room for reality to disappoint,” BlackRock, the world’s biggest money manager, said last week.