Tech Earnings Will Test Rally in Growth Stocks

By Akane Otani

Growth stocks are heading into the final week of January on strong footing.

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., hit a record last week. Tesla Inc.'s market capitalization soared past the $100 billion mark for the first time Wednesday. And the S&P 500 technology sector has continued its run with its 6.2% gain for the year -- easily outperforming the broader index, which has added 2%.

So far this year, investors' appetite for fast-growing companies hasn't let up. But this week, things may get far more volatile: A host of technology-driven firms are scheduled to report quarterly results, 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 companies and low-growth companies is wider than what analysts have seen for about 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.

"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.

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

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

January 27, 2020 07:30 ET (12:30 GMT)

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