Tech ETFs Sink on Microsoft, Google Earnings

Downtrodden big-tech earnings are spilling over into the exchange-traded fund industry, with declining revenues foreshadowing a bleak future for the sector.  

Lackluster quarterly earnings from Alphabet Inc. and Microsoft Inc. late Tuesday weighed on the Nasdaq composite, pulling down the tech-heavy index more than 0.8% by midday Wednesday. The index, which has dropped nearly 30% year to date, is on course for its worse year since 2008.  

Shares of Google’s parent company slipped more than 7%, as the firm reported its fifth consecutive quarter of declining sales growth. Meanwhile, Microsoft shares fell more than 6% after the company said it expects sales of personal computers to decrease.  

Tech-focused ETFs similarly slumped, with the Invesco QQQ Trust (QQQ) declining almost 2% during midday trading.  

Funds with the largest exposure to Alphabet and Microsoft including the Technology Select Sector SPDR Fund (XLK) slipped 1.8%, while the Communication Services Select Sector SPDR Fund (XLC) tumbled almost 2.5% during the trading day, according to ETF.com data. The Direxion Daily Technology Bull 3X Shares (TECL), which offers investors leveraged exposure to U.S. large cap technology companies, plummeted more than 5.4%.  

‘Moment of Truth’ 

“It’s a moment of truth for tech earnings,” said Dan Ives, managing director of equity research at Wedbush Securities and partner in the Wedbush ETFMG Global Cloud Technology ETF (IVES). “Microsoft, Apple, Amazon, Google, Netflix, these have been the main themes for the last decade. But now as we head to a tougher macro [environment], the Street has a lot of questions around how these names will hold up.”  

Alphabet has missed expectations on earnings per share for three consecutive quarters, a far cry from upbeat figures the company posted for nine straight quarters before this year. Microsoft also posted its worst quarterly sales in five years following years of growth.  

Also heavily weighing on international, big-tech conglomerates is the continuing strength of the dollar, which rose 8.6% in the third quarter alone, according to data from Morningstar Inc., as the cost of repatriating earnings takes a chunk out of overall revenue.  

“The most glaring issue with tech and earnings is the strength of the dollar,” Mark Neuman, CIO and founder at Constrained Capital, said pointing to translation losses for companies like Microsoft and Alphabet, which derive nearly half their revenue from overseas operations.  

Despite the tech earnings rout, Ives said he is staying the course.  

“A lot of that is just the stocks being victims of a massive risk-off in a market that's unprecedented for both stocks and bonds. Our view is that we're in a bottoming process, and now is not the time that we abandon our long-term, bullish view of tech,” he said, referring to big-tech names. 

Contact Shubham Saharan at [email protected]