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Previewing Big Tech Earnings

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Technology stocks have been less than stellar performers this year, with a number of last year’s leaders struggling to find traction in an environment that made the previously-shunned cyclical/value stocks more attractive.

You can see the group’s recent performance in the chart below that shows the year-to-date performance of the Zacks Technology sector (blue line; third from the top, up +12.1%) and the S&P 500 index (red line; fourth from the top, up +10.9%), Microsoft (MSFT - Free Report) – purple line; second from the top, up +17.3%), Apple (AAPL – orange line at the bottom, up +1.6%) and Amazon (AMZN – green line, second from the bottom, up +3.6%) and Facebook (FB - Free Report) – light green line, up +10.3%).

As you can see above, Apple (AAPL - Free Report) and Amazon (AMZN - Free Report) are clearly the laggards this year, with Microsoft and Alphabet doing better than the market. Part of the explanation likely is that Apple and Amazon were flying high last year and they have been going through a period of consolidation before resuming their upward move. It will be interesting to see if this week’s quarterly results will help change sentiment on these two stocks, as we saw happen for Alphabet (GOOGL - Free Report) following the search giant’s last earnings release.

These five companies combined now account for 16.9% of the total market capitalization of the S&P 500 index, down from 17.4% of the total in October last year, but still second only to the Technology sector’s weight in the index at 31.4% and above the other 15 sectors, including Finance at 13.4% (Finance’s weight increased from 12.1% in October last year).

The chart below shows the earnings and revenue picture for this group of 5 companies in the aggregate, on a quarterly basis, with expectations for 2021 Q1 highlighted.

The table below shows the group’s earnings picture on an annual basis.

Take a look at the pandemic impacted numbers for 2020 for the group and contrast that to the overall profitability picture for the S&P 500 when the index’s earnings and revenues declined by -13.1% and -1.7%, respectively.

When some people refer to these companies as ‘defensive’ Tech, they are essentially referring to this earnings power that has visibility and stability.

Beyond the big 5 Tech players, total Q1 earnings for the Technology sector as a whole are expected to be up +24.9% from the same period last year on +18.4% higher revenues. The chart below shows the sector’s Q1 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.

This big picture view of the ‘Big 5’ players as well as the sector as whole shows that estimates for the coming periods reflect a decelerating growth trend.

Microsoft and Alphabet will report after the market’s close on Tuesday this week (4/27), while Facebook and Apple will report after the market’s close on Wednesday (4/28) and Amazon on Thursday. Other notable reports this week include Tesla (TSLA - Free Report) , Spotify (SPOT - Free Report) and a host of blue-chip operators in other sectors.

Q1 Earnings Season Scorecard

We now have Q1 results from 123 S&P 500 members or 24.6% of the index’s total membership. Total earnings (or aggregate net income) for these 123 companies are up +46.7% from the same period last year on +5.1% higher revenues, with 83.7% beating EPS and 75.6% beating revenue estimates.

We get into the heart of the Q1 reporting cycle this week, with more than 800 companies on deck to report results, including 180 S&P 500 members.

The two sets of comparison charts below put the Q1 results from these 123 index members in a historical context, which should give us a sense how the Q1 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 123 index members.

The growth comparison is likely not fair, given the unusually high year-over-year growth rates in the Finance sector, a function of big reserve releases and easy comparisons in 2021 Q1.

The Finance sector is such a big factor in the earnings growth rate for the 123 index members that have reported at this stage. On an ex-Finance basis, the Q1 earnings growth for the remaining companies that have reported results drops to only +6%.

But even on an ex-Finance basis, the Q1 earnings growth rate still compares favorably to other recent periods, as the chart below shows.

The second set of charts compare the proportion of these 123 index members beating EPS and revenue estimates.

Overall Expectations for 2021 Q1

Looking at Q1 as a whole, combining the actual results that have come out with estimates for the still to come companies, total earnings for the S&P 500 index are expected to up +30.2% on +6.6% higher revenues.

Part of the strong growth in Q1 is reflective of easy comparisons, as the last month of 2020 Q1 was weighed down by the pandemic, though the full impact showed up in Q2. Those easy comparisons are notable for the Finance, Consumer Discretionary, Transportation and Energy sectors. Profitability in these sectors is notably above the Covid-hit levels of the year-earlier period, but they are still below the comparable period in 2019 (2019 Q1), except for the Finance sector.

But it isn’t just easy comparisons that is giving us the strong aggregate growth in 2021 Q1. A number of sectors, including the all-important Technology sector, are on track to produce genuine growth, i.e., 2021 Q1 profitability growth above pre-Covid levels. These include, in addition to Technology, Construction, Medical, Basic Materials, Consumer Staples and Utilities.

The table below shows summary expectations for 2021 Q1, contrasted with what was actually achieved in 2020 Q4.

The chart below takes a big-picture view of the quarters, showing Q1 earnings and revenue growth highlighted and shown in the context of what was actually achieved in the last few quarters and what is expected in the coming periods.

The chart below shows quarterly earnings totals or quarterly aggregate net income, instead of year-over-year growth rates. This gives us a better appreciation of the pandemic’s earnings imapct and the resulting easy comparisons that are helping the growth rate in Q1 (and even ‘hugely’ in Q2).

The chart below presents the big-picture view on an annual basis. As you can see below, 2021 earnings and revenues are expected to be up +27.5% and +8.6%, respectively, which follows the Covid-driven decline of -13.1% in 2020.

On an index ‘EPS’ basis, the 2021 expectation works out to $173.45, up from $136.10 per ‘Index share’ in 2020. These full-year estimates have been going up as well, as the chart below shows.

We envision this favorable revisions trend to accelerate over the next few months as the vaccination effort reaches a critical mass and greater ‘normalcy’ returns to life.

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>A Very Strong Earnings Picture for Q1 and Beyond

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