Tech Earnings Will Test Rally in Growth Stocks--Update

By Akane Otani 

Growth stocks are on track to close out the month as one of the best-performing groups in the market.

The Renaissance IPO exchange-traded fund, which tracks shares of relatively new entrants to the stock market such as Uber Technologies Inc. and Chewy Inc., rose to a record last week. Tesla Inc.'s market capitalization soared past the $100 billion mark for the first time Wednesday.

The S&P 500 technology sector slipped with the broader market Monday but is still up 3.7% for the year -- outperforming the broader index, which is up 0.4%.

Several technology-driven firms are scheduled to report quarterly results this week, including Microsoft Corp., Facebook Inc., Tesla, Apple Inc. and eBay Inc.

The numbers they release will give investors some idea of whether one of the bull market's most dominant bets remains intact.

Over the past decade, investors have been rewarded for paying a premium for shares of companies that look poised to deliver faster-than-average growth. That has left those shares looking even more expensive than usual.

The gap between the valuation of high-growth and low-growth companies is wider than what analysts have seen 95% of the time over the past 25 years, J.P. Morgan Asset Management said in a note.

Can the rally continue? Believers in mean reversion -- the notion that stock prices that have run up spectacularly should fall back to their long-term average at some point -- would argue that growth stocks will eventually falter.

But so far this year, there hasn't been any sign of the growth trade fading.

Netflix Inc. fell 3.6% Wednesday, a day after missing its forecast for U.S. subscriber growth for the third straight quarter.

It then rebounded to erase all of those losses over the rest of the week. The shares rose 0.3% Monday to $35.48.

"Longer term, we see little sign that the relentless growth in the giant e-commerce businesses that have been such investor favorites is slowing, " J.P. Morgan Asset Management said.

However, investors may be smart to turn an eye to "less well liked and less expensive opportunities," the firm added.

Write to Akane Otani at [e-mail]

(END) Dow Jones Newswires

January 27, 2020 17:59 ET (22:59 GMT)

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