Strong profits seen overcoming concerns about big tech

The second quarter: Start of a tech unwind, or another run at historic highs?

The first quarter started euphorically, with stocks at historic highs in January, but ended in confusion. First it was inflation fears in February, then tariffs and trade wars in March. Worries about big tech came at the end, making it the first down quarter since September 2015.

Opinions are divided about the markets in the second quarter. There are two key facts to keep in mind: The S&P 500 is only 7 percent off its historic highs, and earnings are expected to grow 20 percent in the first quarter, and continue along this path for the rest of the year.

In case you’re not familiar with earnings growth, 20 percent is a huge number. Not surprisingly, the long-term average yearly increase in the S&P 500 is about 7 percent.

The lesson: stocks tend to track future earnings expectations over the long term.

Earnings growth of 20 percent is practically unheard of, particularly after such a bull run. “I have never seen this much strong earnings growth this late in the earnings cycle,” Nick Raich, who tracks earnings under The Earnings Scout moniker, told CNBC.

But the earnings outlook is being overshadowed by concerns in technology. Facebook, Google, Apple, Amazon and Twitter, as well as Tesla, all weighed on the markets in March.

Raich agrees, to a point. “The overall market is not overvalued, but certain tech is overvalued,” he said, pointing to semiconductors and semiconductor capital equipment stocks as one group that could pull back.

The size of the technology space has become an issue for the trading community. Technology is 25 percent of the weighting in the S&P 500, far and away the biggest sector. The big five technology stocks — Apple, Alphabet, Microsoft, Facebook and Amazon (Amazon is technically categorized as a consumer discretionary stock) — together account for 15 percent of the entire S&P 500.

And the earnings expectations around technology are similarly outsized. Technology and financial earnings in the first quarter are expected to be almost double the rest of the S&P 500.