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Breaking Down The Big 7 Tech Players' Outsized Roles

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Stocks have made some nice gains from the October 2022 lows and remain within spitting distance of the recent peak in August last year. In fact, the S&P 500 index is up about +20% from the October lows, prompting some to suggest that the worst is behind us.

This note is focused on the outsized role of the ‘Big 7 Tech Players’ – Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Meta (META - Free Report) , Nvidia (NVDA - Free Report) & Tesla (TSLA - Free Report) – in the market’s strong performance this year.

Market bears justifiably point to the market’s narrow leadership through these ‘Big 7 Tech Players’ as a major argument why they don’t see the rally having sustainable legs. This is a fair point, though we should note that we are starting to see other parts of the market join the leadership team in recent days.

The bears also point to recession risks, the inflation problem being more ‘sticky’ than the market is appreciating, and significant downside risks to current consensus earnings expectations.

Recessions are notoriously hard to predict, and this ‘coming recession’ has proved more challenging than most.

Without a crystal ball, it is hard to know with certainty what lies ahead in the macroeconomy. But most mainstream economists are lowering their recession odds, though they all see above-average risks of economic trouble. With inflation steadily decreasing and the labor market staying fairly strong, many in the market are starting to assign more likely odds to the ‘soft landing’ scenario.

We are seeing some early evidence of this in the real-time earnings estimate revisions data as well. Regular readers of our earnings commentary know that we have consistently flagged a favorable turn in the revisions trend since the start of 2023 Q2. Earnings estimates have been stabilizing in the aggregate after consistently coming down for almost a year and are actually starting to go up for some key sectors.

This combination of favorable macroeconomic developments and optimism about the transformational power of artificial intelligence (AI) seems to be driving market optimism.

The ‘Big 7 Tech Players’ are at the forefront of the market’s AI hopes, as was vividly crystallized by Nvidia’s off-the-charts guidance upgrade on May 24th. That day, Nvidia told the market that instead of the $7 billion-plus that the market expected them to bring in revenues for their July quarter, they see the revenue number to be more like $11 billion.

The May 24th guidance upgrade has put Nvidia shares on a unique trajectory. Valuation questions tend to have an element of subjectivity about them, like ‘beauty being in the eyes of the beholder.’ But no one in their right mind can say with a straight face that Nvidia shares are fairly priced at current levels on most conventional valuation metrics. But what if the May 24th guidance upgrade proves to be the first among many others in the coming quarters?

Getting back to the ‘Big 7 Tech Players’, please note that we are taking somewhat of a license by calling them all to be ‘Tech’ players. For the record, the Zacks sector classification puts Tesla in the Auto sector and Amazon in the Retail sector.

This elite group of 7 mega-cap companies currently accounts for 27.5% of the S&P 500 index’s total market capitalization and is expected to bring in 16.2% of the index’s total earnings this year. This is the same earnings share the group brought in 2020, which increased to 17.4% in 2021 and fell to 14.4% in 2022.

Current consensus expectations call for the group’s earnings share to increase to 17.2% in 2024 and 18.4% in 2025.

For 2023 Q2, the ‘Big 7 Tech Players’ are currently expected to achieve year-over-year earnings and revenue growth rates of +13.2% and +6.1%, respectively. The group is expected to account for 15.4% of all S&P 500 earnings in 2023 Q2.

The expectation is for steadily improving growth in the coming quarters, as the chart below shows.

Zacks Investment Research
Image Source: Zacks Investment Research

The S&P 500 index as a whole is expected to suffer an -8.9% decline in earnings on -0.6% lower revenues in 2023 Q2.

Excluding the contribution from the ‘Big 7 Tech Players’, Q2 earnings for the remaining 493 S&P 500 members would be down -12% on -1.3% lower revenues.

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 Q2 and the following three quarters and actual results for the preceding four quarters.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows this expected growth picture for the 493 S&P 500 members. In other words, we have excluded the contribution from the Big 7 Tech Players.

Zacks Investment Research
Image Source: Zacks Investment Research

To give you a sense of how much these expectations have evolved over the last three months, the -8.9% earnings decline in Q2 today is down from the -7.2% decline that was expected on March 10th, 2023. Estimates for the last two quarters of the year have similarly come down very modestly over the same time period, with 2023 Q3 down from +0.3% earnings growth on March 10th to a decline of -0.7% today and Q4 down from +7.9% then to +5.4% today.

Please note that while 2023 Q2 estimates have come down, the magnitude of negative revisions compares favorably to what we saw in the comparable periods of the preceding couple of quarters. In other words, estimates haven’t fallen as much as they did the last few quarters, not only for Q2 but also for the rest of the year.

As noted earlier, we have been pointing out a notable stabilization in the revisions front lately, which roughly coincided with the start of Q2 in April 2023. This was a shift in the overall revisions trend that had been in place for almost a year before that. 

Getting back to the 2023 Q2 expectations, embedded in the aforementioned 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.

Zacks Investment Research
Image Source: Zacks Investment Research

As you can see above, 2023 Q2 will be the 6th consecutive quarter of declining margins for the S&P 500 index.

Margins in Q2 are expected to be below the year-earlier level for 11 of the 16 Zacks sectors, with the biggest margin pressure expected to be in the Basic Materials, Construction, Energy, Medical, Conglomerates, Autos, Aerospace, and Tech sectors.

On the positive side, the Finance sector is the only one expected to experience significant margin gains, with the Consumer Discretionary sector as a distant second. Sectors expected to be essentially flat margins relative to 2022 Q2 are Retail, Utilities, and Industrial Products.

The chart below shows the earnings and revenue growth picture on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research

As noted earlier in the context of discussing the revisions trend pertaining to 2023 Q2 estimates, we have been observing a notable stabilization in the revisions trend since the start of April 2023.

This stabilization in 2023 earnings estimates represented a notable reversal in the persistently negative trend that had been in place for almost a year. Current expectations for 2023, as represented by the above chart, are down nearly -13% since the April 2022 peak.

Since the start of 2023 Q2 in April, aggregate earnings estimates for 2023 are essentially flat, with 8 of the 16 Zacks sectors enjoying positive estimate revisions in that time period. Sectors enjoying positive estimate revisions since the start of Q2 include Construction, Industrial Products, Autos, Tech, and Retail.

The chart below shows current earnings and revenue growth expectations for the ‘Big 7 Tech Players.’

Zacks Investment Research
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 >>>> Looking Ahead to the Q2 Earnings Season 

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