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The market’s contrasting reactions to Q1 results from four of the ‘Big 5 Tech Players’ – Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Meta (META - Free Report) & Microsoft (MSFT - Free Report) – provides us a window into what market participants see as essential for these stocks to maintain their recent price momentum. Apple (AAPL - Free Report) will report Q1 results on Thursday, May 4th.
All of these stocks have been standout performers in 2023, as you can see in the chart below that illustrates their year-to-date performance relative to the S&P 500 index (red line at the bottom, up +8.3%).
Image Source: Zacks Investment Research
As you can see in this chart, Meta Platforms’ shares were in a league of their own regarding stock market performance, which got a further boost following the Q1 results. The magnitude of the positive reaction to Microsoft’s results wasn’t nearly as strong as it was for Meta, but it was nevertheless very favorable. Amazon and Alphabet shares lost ground following their quarterly releases, although they both exceeded estimates.
The key differentiator among Amazon, Microsoft, and Alphabet are trends in their respective cloud businesses and the perceived headway that each of them is making on the artificial intelligence (AI) front.
The market likes what it is seeing and hearing from Microsoft on both of these fronts and appears somewhat unconvinced of Alphabet and Amazon’s AI efforts. We all know that cloud spending is coming down, but Microsoft is not only seen as gaining share at the expense of Amazon Web Services but is also perceived as getting a growth boost from its AI capabilities.
Looking at the ‘Big 5 Tech Players’ as a whole, combining estimates for Apple with actual results from the others that have reported already, total Q1 earnings for the group are expected to be down -2.5% on +3.8% higher revenues. This is significantly better than the -11.2% decline in earnings on +1.9% higher revenues expected just a week back ahead of these results.
Image Source: Zacks Investment Research
A better-than-expected showing from Apple this week, which is expected to bring in -9.1% lower earnings in Q1 on -4.1% lower revenues, could potentially push the group’s growth rate into positive territory.
The chart above shows that the group’s growth picture is expected to improve, even though it will be a few more quarters before some of the macroeconomic uncertainties are lifted.
The chart below shows the group’s earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
With top-line growth hard to come by due to macro factors, the group has responded to the market’s persistent worries about cost controls by announcing payroll reductions. There is a general feeling in the market that all of them could do more on that front, but their steps are nevertheless helping stabilize their margins picture.
Net margins for the group were down -458 basis points in 2022 but are expected to modestly nudge higher in 2023 and improve further in 2024. That said, current net margins embedded in consensus estimates for the next two years remain below the 2021 level. That said, the 2023 net margin estimate of 18% for the group is above the pre-Covid 2019 level of 17.6%.
Beyond the big 5 Tech players, total Q1 earnings for the Technology sector as a whole are expected to be down -13.2% from the same period last year on -3.6% lower 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.
Image Source: Zacks Investment Research
This big-picture view of the ‘Big 5’ players and the sector as a whole highlight the earnings growth challenge at present. But as you can see below, the Tech space is expected to resume its growth-engine status from next year onwards.
Image Source: Zacks Investment Research
Q1 Earnings Season Scorecard
Including all the quarterly reports released through Friday, April 28th, we now have Q1 earnings from 267 S&P 500 members, or 53.4% of the index’s total membership. Total earnings for these companies are down -2.4% from the same period last year on +4.1% higher revenues, with 77.2% beating EPS estimates and 73% beating revenue estimates. The proportion of these companies beating both EPS and revenue estimates is 59.9%.
Regular readers of our earnings commentary know that we have been referring to the overall picture emerging from the Q1 earnings season as good enough; not great, but not bad either. With results from more than half of the S&P 500 members already out, we can confidently say that corporate earnings aren’t headed towards the ‘cliff’ that market bears were warning us of.
The way we see it, the ‘better-than-feared’ view of the Q1 earnings season at this stage may be a bit unfair, given how resilient corporate profitability has turned out to be. But the view isn’t entirely off the mark either.
We have a super busy reporting docket this week, with almost 1150 companies reporting Q1 results, including 159 S&P 500 members. In addition to the aforementioned earnings release from Apple, this week’s docket has representation from every sector of the economy.
Below, we compare the Q1 results thus far from what we have seen from this same group of 90 index members in other recent periods.
The first set of charts compares the earnings and revenue growth rates for the 90 index members that have reported with what we had seen from the group in other recent quarters.
Image Source: Zacks Investment Research
The comparison charts below put the Q1 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
To get a sense of what is currently expected, take a look at the chart below that shows current earnings and revenue growth expectations for the S&P 500 index for 2023 Q1 and the following three quarters.
Image Source: Zacks Investment Research
As you can see here, 2023 Q1 earnings are expected to be down -5.7% on +2.8% higher revenues. This would follow the -5.4% earnings decline in the preceding period (2022 Q4) on +5.9% higher revenues.
Embedded in these 2023 Q1 earnings and revenue growth projections is the expectation of continued margin pressures, a recurring theme in recent quarters. The chart below shows the year-over-year change in net income margins for the S&P 500 index.
Image Source: Zacks Investment Research
Actual results are proving a lot better on the margins front relative to what was expected ahead of the releases.
Estimates for Q1 came down as the quarter got underway, in line with the trend that had been in place since the start of 2022. That said, the magnitude of negative revisions to Q1 estimates was smaller relative to what we had seen in the preceding two periods.
Estimates for full-year 2023 have also been coming down as well, as we have been pointing out consistently in these pages.
The chart below shows the earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>2023 Q1 Earnings: Good Enough, but not Great
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Breaking Down Big Tech Earnings
The market’s contrasting reactions to Q1 results from four of the ‘Big 5 Tech Players’ – Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Meta (META - Free Report) & Microsoft (MSFT - Free Report) – provides us a window into what market participants see as essential for these stocks to maintain their recent price momentum. Apple (AAPL - Free Report) will report Q1 results on Thursday, May 4th.
All of these stocks have been standout performers in 2023, as you can see in the chart below that illustrates their year-to-date performance relative to the S&P 500 index (red line at the bottom, up +8.3%).
Image Source: Zacks Investment Research
As you can see in this chart, Meta Platforms’ shares were in a league of their own regarding stock market performance, which got a further boost following the Q1 results. The magnitude of the positive reaction to Microsoft’s results wasn’t nearly as strong as it was for Meta, but it was nevertheless very favorable. Amazon and Alphabet shares lost ground following their quarterly releases, although they both exceeded estimates.
The key differentiator among Amazon, Microsoft, and Alphabet are trends in their respective cloud businesses and the perceived headway that each of them is making on the artificial intelligence (AI) front.
The market likes what it is seeing and hearing from Microsoft on both of these fronts and appears somewhat unconvinced of Alphabet and Amazon’s AI efforts. We all know that cloud spending is coming down, but Microsoft is not only seen as gaining share at the expense of Amazon Web Services but is also perceived as getting a growth boost from its AI capabilities.
Looking at the ‘Big 5 Tech Players’ as a whole, combining estimates for Apple with actual results from the others that have reported already, total Q1 earnings for the group are expected to be down -2.5% on +3.8% higher revenues. This is significantly better than the -11.2% decline in earnings on +1.9% higher revenues expected just a week back ahead of these results.
Image Source: Zacks Investment Research
A better-than-expected showing from Apple this week, which is expected to bring in -9.1% lower earnings in Q1 on -4.1% lower revenues, could potentially push the group’s growth rate into positive territory.
The chart above shows that the group’s growth picture is expected to improve, even though it will be a few more quarters before some of the macroeconomic uncertainties are lifted.
The chart below shows the group’s earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
With top-line growth hard to come by due to macro factors, the group has responded to the market’s persistent worries about cost controls by announcing payroll reductions. There is a general feeling in the market that all of them could do more on that front, but their steps are nevertheless helping stabilize their margins picture.
Net margins for the group were down -458 basis points in 2022 but are expected to modestly nudge higher in 2023 and improve further in 2024. That said, current net margins embedded in consensus estimates for the next two years remain below the 2021 level. That said, the 2023 net margin estimate of 18% for the group is above the pre-Covid 2019 level of 17.6%.
Beyond the big 5 Tech players, total Q1 earnings for the Technology sector as a whole are expected to be down -13.2% from the same period last year on -3.6% lower 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.
Image Source: Zacks Investment Research
This big-picture view of the ‘Big 5’ players and the sector as a whole highlight the earnings growth challenge at present. But as you can see below, the Tech space is expected to resume its growth-engine status from next year onwards.
Image Source: Zacks Investment Research
Q1 Earnings Season Scorecard
Including all the quarterly reports released through Friday, April 28th, we now have Q1 earnings from 267 S&P 500 members, or 53.4% of the index’s total membership. Total earnings for these companies are down -2.4% from the same period last year on +4.1% higher revenues, with 77.2% beating EPS estimates and 73% beating revenue estimates. The proportion of these companies beating both EPS and revenue estimates is 59.9%.
Regular readers of our earnings commentary know that we have been referring to the overall picture emerging from the Q1 earnings season as good enough; not great, but not bad either. With results from more than half of the S&P 500 members already out, we can confidently say that corporate earnings aren’t headed towards the ‘cliff’ that market bears were warning us of.
The way we see it, the ‘better-than-feared’ view of the Q1 earnings season at this stage may be a bit unfair, given how resilient corporate profitability has turned out to be. But the view isn’t entirely off the mark either.
We have a super busy reporting docket this week, with almost 1150 companies reporting Q1 results, including 159 S&P 500 members. In addition to the aforementioned earnings release from Apple, this week’s docket has representation from every sector of the economy.
Below, we compare the Q1 results thus far from what we have seen from this same group of 90 index members in other recent periods.
The first set of charts compares the earnings and revenue growth rates for the 90 index members that have reported with what we had seen from the group in other recent quarters.
Image Source: Zacks Investment Research
The comparison charts below put the Q1 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
To get a sense of what is currently expected, take a look at the chart below that shows current earnings and revenue growth expectations for the S&P 500 index for 2023 Q1 and the following three quarters.
Image Source: Zacks Investment Research
As you can see here, 2023 Q1 earnings are expected to be down -5.7% on +2.8% higher revenues. This would follow the -5.4% earnings decline in the preceding period (2022 Q4) on +5.9% higher revenues.
Embedded in these 2023 Q1 earnings and revenue growth projections is the expectation of continued margin pressures, a recurring theme in recent quarters. The chart below shows the year-over-year change in net income margins for the S&P 500 index.
Image Source: Zacks Investment Research
Actual results are proving a lot better on the margins front relative to what was expected ahead of the releases.
Estimates for Q1 came down as the quarter got underway, in line with the trend that had been in place since the start of 2022. That said, the magnitude of negative revisions to Q1 estimates was smaller relative to what we had seen in the preceding two periods.
Estimates for full-year 2023 have also been coming down as well, as we have been pointing out consistently in these pages.
The chart below shows the earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>2023 Q1 Earnings: Good Enough, but not Great