Tech stocks are having their best January in decades — here’s why that may not be a good sign

In case you don’t remember what was happening in 2001, it became known as the dot-com bust. After years of optimism about the path of technology took the stock market to new peaks in 2000, the bottom fell out, and while there were several reversals like the January 2001 gains, the overall downward direction of the market after the tech bubble popped did not turn around completely until late 2002.

The setup feels similar this year, as tech stocks plunged in 2022 from record peaks experienced during a wave of optimism about the trajectory of young public tech companies. The Nasdaq had its fourth worst year on record, and worst since 2008.

Admittedly, prior periods in which the Nasdaq enjoyed a 10%-plus gain in the first month of a year panned out better. The index’s average performance in such situations was a 14.1% rise for the rest of the year.

The Nasdaq is seeing its best monthly performance since July 2022, according to Dow Jones Market Data, and it’s also on track to log its seventh best January gain on record.

The S&P 500 Communication Services Sector, which includes Meta Platforms Inc. META, +3.01%, Netflix Inc. NFLX, -1.12% and many big telecommunications stocks, is set to record its fourth straight week of gains. That would mark its longest winning streak since one that ended in October 2020. It’s up 14.8% so far this month and on track for its best month since October 2002, along with its best January on record.

The rally in tech comes even as numerous big names have issued grim warnings. Microsoft Corp. MSFT, +0.06% saw its cloud business slow in the latest quarter and expects further deceleration, a forecast suggesting that the rest of the cloud industry could be in for further pain as well. And Intel Corp.’s INTC, -6.41% business continues to melt down, partly due to industrywide challenges and partly due to its own missteps.

Opinion: Intel just had its worst year since the dot-com bust, and it won’t get better anytime soon

Tech companies have been giving investors what they seem to want in the current environment, executing on layoffs and other cost cuts. But given massive run ups in hiring during the pandemic, it remains to be seen whether the recent wave of job cuts will have much financial impact. Alphabet Inc.’s GOOGL, +1.90% GOOG, +1.56% 12,000 planned layoffs won’t even walk back the number of hires the company made in the third quarter alone, and one billionaire is pushing for more.

The outlook could get a lot clearer next week, when some of the biggest tech companies in the world deliver holiday earnings and potentially forecasts for the year ahead. In addition to Facebook parent Meta and Google parent Alphabet, results are expected from Amazon.com Inc. AMZN, +3.04% — which could determine on its own if profit grows for the S&P 500 index SPX, +0.25% this year — Apple Inc. AAPL, +1.37% and Intel rival Advanced Micro Devices Inc. AMD, +0.32%.