Tech stocks look strong, but here’s a sign the sector is actually under a lot of stress

That comes just two days after fellow ad agency Omnicom Group Inc.’s stock
OMC,
-4.94%
tumbled 10.4% to pace the S&P 500’s decliners, after also missing on revenue and providing a somewhat downbeat outlook, amid a “pause” in tech-sector spending as clients have become “more cautious.”

And the companies also said they saw softness from tech-sector clients in their first-quarter reports.

That might seem counterintuitive to investors, given that the technology sector has been the S&P 500’s strongest this year. The Technology Select Sector SPDR exchange-traded fund
XLK,
-0.05%
has soared 41.5% year to date, while the S&P 500 index
SPX,
+0.03%
has advanced 18.2%.

Interpublic Chief Executive Philippe Krakowsky said Friday on a post-earnings call with analysts that the tech sector is moving through a “challenging period” that has included significant cost and workforce cuts.

“[W]hat we have seen is that the sector is under a lot of stress,” Krakowsky said, according to an AlphaSense transcript.

He said the pressure Interpublic has seen in sector isn’t from smaller tech companies, or those backed by venture capitalists, but a “relatively small group of large companies.”

And given a “modestly more uncertain” macroeconomic environment, Krakowsky said it’s clear that pressure on the tech sector “is not abating.”

“[I] don’t think that we’re going to be able to call the turn,” Krakowsky said. While he’s confident the tech sector will eventually bottom, “it’s just they’re clearly going through something that is more protracted than any of us thought.”

Interpublic reported before Friday’s open second-quarter net income that rose to $265.5 million, or 68 cents a share, from $229.6 million, or 58 cents a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of 74 cents beat the FactSet consensus of 61 cents.

Revenue fell 2.5% to $2.67 billion, below the FactSet consensus of $2.39 billion.

For 2023, the company cut its organic growth guidance range to 1% to 2% from 2% to 4%.

Wells Fargo analyst Steven Cahall said that the disappointing earnings reports from the two companies this week are a worrying sign of “gathering clouds” for ad agencies, with risks of a “derating” of the stocks on the horizon.

“It doesn’t feel like a soft landing,” Cahall wrote in a note to clients.

Interpublic’s stock has lost 1.3% year to date and Omnicom shares have tacked on 2.8%, while the S&P 500 has gained 18.2%.