Upcoming Earnings Reports - Can Mega-cap Tech Earnings Lead a Q4 Rally?

All eyes are now on the upcoming third-quarter earnings reports from mega-cap technology companies.

In the week starting October 23, quarterly earnings are expected from Microsoft (MSFT), Google-parent Alphabet (GOOGL) and Amazon (AMZN), with results out from Apple (AAPL) the following week on November 2 and Nvidia (NVDA) expected 2 weeks later on November 15.

Investors face many challenges, including soaring interest rates and geopolitical concerns in the Middle East. These issues have weighed on market sentiment, making earnings season a much-needed source of positivity.

Earnings FAQ

What is Earnings Season?
Earnings season occurs when public companies release quarterly financial reports, providing insights into their financial health and performance. This typically happens four times a year. Right now we are in the fourth quarter so companies are reporting third quarter results.

Why are Earnings Important for Investors?
Earnings are vital because they show a company's profitability, both the absolute value and the relative value of earnings versus previous periods. Investors use this information to make informed decisions on buying, holding, or selling stocks. Earnings also offer insights into industry trends and the overall economy.

How Can Investors Benefit from Corporate Earnings?
Investors use earnings reports to make informed stock choices, manage risk, and identify investment opportunities. These reports aid in portfolio rebalancing, strategic planning for short-term trades, and identifying undervalued or overvalued stocks for long-term investments.

The Huge Influence of Mega Cap Tech on the S&P 500

Apple, Alphabet, Amazon.com, Microsoft, and Nvidia are not only major players in the technology sector but also hold substantial sway in the overall performance of the S&P 500 Stock Index. These five companies account for about 25% of the index’s market capitalization, indicating their significant influence.

The technology sector, led by these five companies, has outperformed the overall market in 2023. Their performance was instrumental in the S&P 500’s 13% advance this year.

Source: FlowBank, TradingView

Should this level of influence continue, the 5 earnings reports from three mega-cap tech stocks could make or break the chance of an end-of-year rally in the stock market.

Consensus Q3 Earnings Expectations

  • AAPL - 1.39 EPS (up from 1.29 last year)
  • GOOGL - 1.47 EPS (up from 1.06 last year)
  • AMZN - 0.58 EPS (up from 0.20 last year)
  • MSFT - 2.65 EPS (up from 2.35 last year)
  • NVDA - 3.01 EPS (up from 0.34 last year)

The Potential for Upside in Big Tech Stocks

Big tech firms anticipated earnings growth is substantial, with a projected +34% increase year-over-year, according to Bloomberg Intelligence. Even in a climate of soaring interest rates and geopolitical upheavals, these companies’ financials appear robust.

Without these firms’ contributions, earnings from the S&P 500 are expected to decline by 5%. However, the inclusion of their earnings leaves S&P 500 earnings flat overall. This underscores the pivotal role these tech giants play in not just the technology sector but the broader market.

Market leadership and strong momentum remain the favour of big tech stocks in light of the big gains already made this year. The open question is whether this can continue or some kind of rotation to value stocks or other areas of the market comes next.

Downside Risks for Tech

One notable concern is the rich valuations of these tech giants. For instance, Apple and Microsoft are priced at 27 and 29 times estimated earnings, respectively, significantly above their 10-year averages. These elevated valuations raise questions about the sustainability of their stock prices and pressure these corporations to deliver exceptional earnings consistently.

However, this view on valuations is not shared by all. The recent decline of the Nasdaq 100 in the face of rising earnings expectations has resulted in what Goldman Sachs terms “historically cheap valuations” on a relative basis for tech stocks.

Specific issues such as Apple's dampened sales in China, where iPhone 15 sales fell by a double-digit percentage from its predecessor, underscore the potential market volatility and competitive pressures big tech companies are susceptible to.

These aspects, coupled with the broader market’s sensitivity to interest rates and geopolitical events, exemplify the nuanced risk landscape surrounding the tech sector. While rising interest rates coincided with very weak tech stock performance in 2022, mega-cap stocks specifically have gained an almost haven status that could retain their appeal if recession expectations rise.

In Summary

As Q3 earnings approach, mega-cap tech stocks present a two-sided coin. On the one hand, there's remarkable potential, showcased by projected earnings growth and influential market positions. Conversely, rich valuations and company-specific challenges, like Apple's sales dip in China, bring risks to the forefront.

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