In a striking turnaround, US tech giants and major internet corporations have surged back to profits reminiscent of pre-pandemic levels, despite earlier job cuts aimed at cost reduction. This resurgence in earnings is anticipated to help offset the lingering slump in industries such as energy and healthcare.
The five colossal entities in the S&P 500 Index—Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., and Nvidia Corp.—commanding a quarter of the benchmark’s market capitalization, are poised for an estimated 34% surge in earnings from the preceding year, according to Bloomberg Intelligence’s aggregated analyst projections.
While the S&P 500 Index as a whole faces a prospect of relatively stagnant profits, it is crucial to note that this index would witness a 5% dip sans the influence of these five industry behemoths.
Gary Bradshaw, a portfolio manager at Hodges Capital Management, stressed the pivotal role of the US tech giants in sustaining market confidence, emphasizing, “It’s very important for the big tech stocks to deliver.” He went on to assert that there is a widespread anticipation of strong earnings across the board, asserting that megacap tech entities possess the potential to lead the market into the final quarter of the year.
The recent surge in interest rates, with the 10-year Treasury yield reaching its highest point in over a decade, has sent tremors through the markets. Inflation reports surpassing expectations have led investors to brace for a resolute stance from the Federal Reserve, possibly culminating in further rate hikes. This economic landscape has rekindled concerns of an impending recession, amplified by geopolitical tensions in the Middle East.
Tech stocks have weathered these challenges, with the tech-centric Nasdaq 100 enduring a two-month slide. However, they have significantly outperformed the broader market, spearheading the S&P 500’s 13% upswing this year.
Netflix Inc. and Tesla Inc. are slated to initiate tech-related earnings this Wednesday. Alphabet, Microsoft, Amazon, and Meta Platforms Inc. will follow suit in the subsequent week. Apple’s announcement is scheduled for Nov. 2, while Nvidia is slated to report on Nov. 21.
Mike Bailey, Director of Research at FBB Capital Partners, underscored the need for a repeat of the robust second-quarter earnings in the third quarter, given the substantial weight of these tech giants. He asserted, “You can bet that the rest of the market will play follow the leader as big tech earnings unfold this quarter.” Bailey expressed confidence in the relatively low likelihood of a tech earnings setback this quarter.
Investors have solid grounds for optimism. Historical data compiled by Bloomberg reveals that the S&P 500 has seen an upswing during reporting seasons approximately two-thirds of the time in the past century.
However, one potential hurdle to a profit-driven surge is that much of the anticipated positive news may already be factored into stock prices. Alphabet and Amazon have seen gains of over 50% this year, while Apple and Microsoft have surged by nearly 40%.
In addition to soaring profit expectations, these stocks have been buoyed by the belief that the US tech giants are best poised to capitalize on generative artificial intelligence. This sentiment prevails despite Nvidia being the lone entity to register significant financial gains from this trend, with its shares tripling in value this year.
Investors remain wary as the stock-market valuations of these tech titans, despite recent declines, continue to hover at elevated levels. Apple and Microsoft are currently valued at approximately 27 and 29 times estimated earnings, respectively—well above the historical averages of the past decade. In contrast, the S&P 500 as a whole stands at around 18.
Kim Forrest, Founder and Chief Investment Officer at Bokeh Capital Partners, pointed out that costly share prices exert substantial pressure on companies to consistently deliver robust earnings. She emphasized, “They have to constantly deliver or they will lose the attention of investors…these rich valuations need to be justified.”
Nvidia, buoyed by the artificial intelligence frenzy sweeping Wall Street, has surged by over 200% this year. Analysts’ average price targets suggest an expected 44% rise in the next 12 months, indicating room for further growth. On Monday, shares of the semiconductor company saw marginal fluctuations.
The resurgence of profits among US tech giants marks a significant rebound, showcasing their resilience and pivotal role in the broader market landscape.
Source: Bloomberg
