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Previewing Big Tech Earnings

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Technology stocks have lost some of their shine in recent weeks, as some previously ignored groups appear to be finally catching a bid. But Technology still remains the undisputed leader in the market, with the major players in the space still accounting for a big part of the market’s gains since the pandemic.

You can see the group’s recent outperformance in the chart below that shows the year-to-date performance of the Zacks Technology sector (red line) and the S&P 500 index (green line), Microsoft (MSFT – orange line), Apple (AAPL – blue line) and Amazon (AMZN – purple line).

 

 

 

 

 

 

 

 

 

 

 

 

As you can see above, the performance variance between the Tech sector and the broader index (+27% vs. +7.4%) is very clear, with Microsoft (MSFT - Free Report) , Apple (AAPL - Free Report) and Amazon (AMZN - Free Report) doing significantly better.

One can make several arguments about why other groups of stocks should also form part of the market’s leadership team. But it is hard to deny that the prominence of these Tech stocks is grounded in fundamental realities. These major Tech players, along with Facebook (FB - Free Report) , Alphabet (GOOGL - Free Report) and a few others have become even more central and critical to how we live and work in these unusual times. Along the way, these companies have become enormously profitable, which we will see afresh as all five of these come out with Q3 results this week.

These five companies combined now account for 17.4% of the total market capitalization of the S&P 500 index, which is only behind the Technology sector’s weight in the index at 32% and above the other 15 sectors, including Finance at 12.1%.

The table below shows the earnings and revenue picture for this group of 5 companies in the aggregate, on an annual basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

Take a look at the pandemic affected numbers for the current year for the group and contrast that total earnings for the S&P 500 index are on track to decline -19.5% on -4.5% lower revenues this year. In other words, the market likes the group’s highly visible and far less risky growth profile.

Beyond the big 5 Tech players, total Q3 earnings for the Technology sector as a whole are expected to be down -3.2% from the same period last year on +4.6% higher revenues. The chart below shows the sector’s Q3 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming three periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

Please note that the Tech sector’s Q3 earnings growth would be +0.9% instead of -3.2% had it not been for the drag from Intel (INTC - Free Report) and Apple. Intel had another disappointing quarterly showing on Thursday and we will find out on Thursday October 29th whether Apple’s Q3 results come out.

Q3 Earnings Season Scorecard (as of Friday, October 23rd)

We now have Q3 results from 135 S&P 500 members or 27% of the index’s total membership. Total earnings (or aggregate net income) for these 135 companies are down -15.5% from the same period last year on -5.2% lower revenues, with 85.2% beating EPS estimates and 79.3% beating revenue estimates.

The two sets of comparison charts below put the Q3 results from these 135 index members in a historical context, which should give us a sense how the Q3 earnings season is tracking at this stage relative to other recent periods.

The first set of comparison charts compare the earnings and revenue growth rates for these 135 index members.

 

 

 

 

 

 

 

 

 

 

The second set of charts compare the proportion of these 135 index members beating EPS and revenue estimates.

 

 

 

 

 

 

 

 

 

 

 

As you can see above that not only is the pace of declines decelerating, but also a much bigger proportion of companies are beating EPS and revenue estimates.

We get into the heart of the Q3 reporting cycle this week, with almost 900 companies on deck to report results, including 186 S&P 500 members. In addition to the aforementioned Tech companies that are reporting this week, we have a fairly representative cross section of operators from all sectors coming out with results this week, including the big oil companies.

Looking at Q3 as a whole, combining the actual results that have come out with estimates for the still-to-come companies, total earnings for the index are expected to be down -17.3% on -2.2% lower revenues.

The key factor from the market’s standpoint is how estimates for 2020 Q4 evolve as companies report their Q3 results. The trend thus far is positive, as the chart below shows.

 

 

 

 

 

 

 

 

 

 

 

The chart below takes a big-picture view of the quarters, showing Q3 earnings (green bars) and revenue (Orange bars) growth in the context of what was actually achieved in the last few quarters and what is expected in the coming periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

The chart below presents the big-picture view on an annual basis. As you can see below, 2020 earnings and revenues are expected to be down -19.5% and -4.5%, respectively.

 

 

 

 

 

 

 

 

 

 

 

The above annual growth picture approximates to an index ‘EPS’ of $128.80 for 2020, down from $159.95 in 2019 and $159.58 in 2021.

For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Exploring the Improving Q3 Earnings Picture  

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