MarketWatch First Take: As Silicon Valley chokes on smoke, Wall Street sends clouds of doubt about tech


A devastating and deadly fire has choked Silicon Valley with smoke for nearly two weeks, making it hard to breathe and clouding the ability to see into the distance.

The view of the Valley’s core industry is not any clearer or easier to stomach at the moment. As the smoke has hung over the Bay Area, dark clouds of doubt have also arrived from Wall Street, as the peak of tech earnings season has ended with little clarity on how long the tech boom can last.

“Similar to the air quality in the Valley, the near-term outlook remains smoky (cloudy) with pockets of demand weakness and uncertain political/tariff effects,” Matthew Ramsay, a Cowen & Co. analyst who just led an investor tour on a visit of more than a dozen chip companies in Silicon Valley, wrote in a note.

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Last week’s flurry of reports largely brought a close to tech’s earnings season, which just has a few late-arriving reports from companies with strange fiscal years left on the schedule. With most of the numbers in, investors have shown little confidence in sending tech stocks tumbling this week, with the Nasdaq Composite Index COMP, -1.56%  falling 3% Monday and trading down about 2% on Tuesday. Combined with declines early in the quarter, ahead of the reports, the tech-heavy index is now down more than 10% in the past three months.

There is a big disconnect between the numbers that tech companies reported and the reaction from investors, however. Tech companies as a group destroyed analysts’ expectations for third-quarter profit and revenue: The information-technology sector of the S&P 500 index SPX, -1.66%  is showing earnings growth of 24% and sales growth of 10.7% after nearly 90% of companies have reported, while analysts had predicted 13.6% and 8.5% respectively, according to FactSet. The new communication-services sector — which was created earlier this year and includes big names such as Google parent Alphabet Inc. GOOGL, +0.54%  , GOOG, +0.73%  Facebook Inc. FB, +0.83%   and Netflix Inc. NFLX, -1.11%  — reported earnings growth of 31.9% and sales growth of 19.4%, against expectations of 22.3% and 16%, with all companies reporting.

The problem for analysts and investors is not so much in the huge numbers tech companies reported, but the expectations that they will not last. Two of the biggest names in tech, Apple Inc. AAPL, -4.91%   and Inc. AMZN, -0.54%  , predicted huge sequential declines in their revenue growth rates for the holiday season. Semiconductor companies — which have enjoyed strong gains in recent years as the data-center boom, advances in machine learning and other needs have caused demand to spike — signaled a widespread downturn for at least the next quarter or two.

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The takeaway generally has been that the environment for tech sharply shifted this fall. While the long-term outlook for tech may not have changed much, the road to get there is suddenly unclear.

“In short, near-term things are tough and investor worry is high despite long-term secular drivers in datacenter, autos, IoT/industrial and gaming,” Cowen’s Ramsay wrote. “Overall, we believe the environment slowed sharply in mid-September and companies across the group hadn’t fully digested this during this earnings cycle.”

Semiconductors are often seen as a leading indicator of economic trends, especially technology demand, because of where they are in the global supply chain. The Trump administration’s trade war with China and the effects of the higher costs of goods is causing some companies to pause. At the same time, the prices of memory chips, a key component in many tech products, are falling, hurting former highflier Micron Technology Inc. MU, -1.76%   Slowing demand, combined with lots of inventories on hand, is a recipe for a slowdown in many sectors of tech, as Nvidia Corp. NVDA, +3.80%   proved in a dramatic finale to earnings season.

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While concerns sprung up early in the season with Texas Instruments Inc. TXN, +2.43%  predicting a slowdown, Apple has been the biggest catalyst for the recent decline. The Dow Jones Industrial Average DJIA, -2.11%  component has caused multiple suppliers to slash their own forecasts, leading to reports of slashed production orders for all three of the new iPhones that it debuted in September, particularly its new low-end model, the iPhone XR. Apple did itself no favors beyond a disappointing forecast, as it decided to stop providing unit sales results for the iPhone and other products, leading many to believe that Apple has realized those numbers will fall.

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There are few bright spots elsewhere in tech. Facebook and Alphabet are engulfed in separate sets of issues, neither of which will help their reputations as they fight for tech talent in the Bay Area. While cloud software is still a darling for investment analysts, many see a pullback as potential for needed consolidation in that sector after many considered recent large acquisitions by SAP SE SAP, -0.79%   and International Business Machines Corp. IBM, -2.64%  to have too large a price tag.

For residents of Silicon Valley, struggles on the stock market for the large tech companies are far down a priority list that begins with putting out the worst wildfire in state history, mourning the dead and protecting ourselves from the toxic air all around us. Wall Street, however, seems more concerned with what will remain once the smoke clears.

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