Mega-cap tech stocks are poised to drop as earnings for giants like Alphabet and Meta have left investors 'screaming for financial discipline,' analyst says

• Mega-cap stocks could see a valuation reset as Meta and Alphabet earnings have disappointed, an analyst said.
• Tech giants are seeing less advertising revenue, but traditional ad agencies haven't been hit as hard, suggesting industry-specific troubles.

Big Tech stocks have stumbled this week after reporting downbeat earnings, and a valuation reset could be looming as traders digest weakness in the sector, according to New York Stock Exchange senior market strategist Michael Reinking.

While Meta, Alphabet, and Microsoft have reported similar slowdowns in digital advertising growth over the last quarter, traditional ad agencies like IPG and Publicis have reported reasonably positive results, suggesting obstacles are related specifically to Big Tech, he noted.

"It's clear that there are headwinds for the industry after a period of unsustainable growth coming out of the pandemic, IOS privacy changes, growing competition and macro headwinds," Reinking told Insider.

Shares of Meta shed 20% early Thursday as the Facebook parent gave a weak revenue forecast late Wednesday, wiping off $67 billion from its market capitalization, according to Reuters.

On Tuesday, Google parent Alphabet reported an unexpected slowdown in digital-ad growth, with execs blaming the challenging economic landscape.

Also on Tuesday, Microsoft posted its weakest quarterly sales growth in five years thanks to a soaring dollar and cratering ad revenue.

"Many of the mega-cap stocks have traded lower, but we aren't necessarily trading to new lows," Reinking said. "These stocks broadly trade at premium valuations to the market, which suggests there may need to be some valuation reset."

In his view, predictions heading into the third-quarter earnings season mirrored the low expectations of last quarter. Analysts thought companies would slash guidance during the second quarter, but it didn't happen then and it has yet to happen now.

"This quarter has made it clear that investors are now screaming for financial discipline from these companies after a period of aggressive hiring and spending," Reinking said.