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Previewing Big Tech Earnings: What Can Investors Expect?
Tech stocks have primarily traded sideways over the last couple of months but have otherwise been standout performers this year. The group’s momentum and outperformance have been driven by a combination of favorable developments on the macro front, primarily growing clarity about an exit from the Fed’s tightening cycle, optimism about the impact of artificial intelligence (AI) that some view warily as reminiscent of the late-1990’s, and an emerging sense that the worst of Tech spending headwinds is either behind us or close to that stage.
With many Tech companies on deck to report September-quarter results this week, the market will be looking for more color on business spending trends, particularly on the cloud side.
A big part of Tech’s improved earnings outlook over the last few months has been a function of more effective cost controls that have helped stabilize margins. Improved clarity on top-line trends will help solidify the nascent favorable revisions trend and undergird the group’s impressive stock market momentum.
On top of it all is the AI debate, where we have already seen direct revenue impact from the likes of Nvidia and some ideas from Microsoft. Still, the innovation’s productivity-enhancing potential appears to be off in the future.
The stock market is essentially a discounting system of the future. To the extent that we see viable business models in the days ahead that make use of AI and the so-called large language models, beyond Nvidia selling more capable chips, and Microsoft starting to charge for new AI-driven bells and whistles in its Office productivity suite, the stock market excitement would be totally justified.
These topics will be front and center in this week’s earnings reports from four of the ‘Big 7 Tech players’ - Alphabet and Microsoft after the market’s close on Tuesday (10/24), Instagram and WhatsApp parent Meta Platforms after the close on Wednesday (10/25) and Amazon after the market’s close on Thursday (10/27). Of the remaining three members of this ‘club,’ Tesla has reported already, and Apple and Nvidia are expected to report Q3 results on November 2nd and 15th, respectively.
As impressive as this stock market performance has been for these players, we can see that most of them essentially went sideways to down during Q3. Amazon has lost relatively more ground lately, mainly driven by the regulatory overhang in the wake of the Federal Trade Commission (FTC) lawsuit.
Digital advertising has historically been seen as core to Alphabet and Meta, but Amazon has also become a major player in the space. Ad spending stabilized during the last reported period (2023 Q2). Given the macroeconomic uncertainties, it will be interesting to see how these management teams see trends for the current and coming periods. This will also be at play in the Snap report, which reports Q3 results on Tuesday this week.
All of these companies are big players in the artificial intelligence (AI) space, with the Microsoft vs. Alphabet rivalry particularly intense. With the initial excitement around ChatGPT and other AI applications now behind us, the questions now center around how these AI capabilities will be monetized through new and existing business models. It is reasonable to expect each of these management teams to spend considerable time on their Q3 earnings calls discussing their AI plan.
The group is expected to bring in +34% more earnings relative to the same period last year on +10.9% higher revenues. Please note that these expectations have steadily increased as Q3 unfolded, with the current +34% earnings growth expectation up from +21.5% three months ago. As with Q3 estimates, earnings estimates for the last quarter of the year have also increased.
As we all know by now, the group’s phenomenal boost in 2021 partly reflected pulled forward demand from future periods that was in the process of getting adjusted last year and this year. As you can see above, the expectation is for the group to resume ‘regular/normal’ growth next year, but a lot of that is contingent on how the macroeconomic picture unfolds.
Beyond these mega-cap players, total Q3 earnings for the Technology sector as a whole are expected to be up +11.3% from the same period last year on +3.2% higher revenues.
As was the case with the ‘Big 7 Tech Players,’ the overall Tech sector has been dealing with pulled forward revenues and earnings during Covid over the last many quarters. In fact, earnings growth for the Zacks Tech sector turned positive only in the preceding quarter (2023 Q2) after remaining in negative territory during the four quarters prior.
This big-picture view of the ‘Big 7 players’ and the sector as a whole shows that the worst of the growth challenge is shifting into the rearview mirror.
This Week’s Notable Earnings Releases
Including all the earnings reports through Friday, October 20th, we now have Q3 results from 86 S&P 500 members. Total Q3 earnings for these 86 index members are up +1.9% from the same period last year on +5.8% higher revenues, with 79.1% beating EPS estimates and 61.6% beating revenues estimates.
The reporting cycle really ramps up this week, with more than 650 companies reporting Q3 results, including 160 S&P 500 members. In addition to the aforementioned Big Tech players, we have a representative cross-section of companies from all sectors coming out with results this week.
Companies are comfortably beating consensus EPS estimates but coming up a bit short on the revenue beats percentages. This becomes clearer when we look at the ‘blended’ beats percentage for Q3, which shows the proportion of these 86 index members that have beaten both EPS and revenue estimates.
The Earnings Big Picture
Looking at 2023 Q3 as a whole, the expectation currently is of S&P 500 earnings declining by -1.8% from the same period last year on +0.8% higher revenues. This would follow the -7.1% decline on +1.1% higher revenues in 2023 Q2.
2023 Q3 is expected to be the last period of declining earnings for the index, with positive growth resuming from 2023 Q4 onwards. In fact, had it not been for the Energy sector drag, earnings growth in 2023 Q3 would already be positive.
Look at current expectations for next year and the year after to understand the disconnect between the reality of current bottom-up aggregate earnings estimates and the seemingly never-ending worries about an impending economic downturn. That said, most economic analysts have been steadily lowering their recessionary odds in recent months.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>The Q3 Earnings Season Kicks Off Positively
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Amazon, Alphabet, Nvidia, Meta and Microsoft are part of Zacks Earnings Preview
For Immediate Release
Chicago, IL – October 23, 2023 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Nvidia (NVDA - Free Report) , Meta Platforms (META - Free Report) and Microsoft (MSFT - Free Report) .
Previewing Big Tech Earnings: What Can Investors Expect?
Tech stocks have primarily traded sideways over the last couple of months but have otherwise been standout performers this year. The group’s momentum and outperformance have been driven by a combination of favorable developments on the macro front, primarily growing clarity about an exit from the Fed’s tightening cycle, optimism about the impact of artificial intelligence (AI) that some view warily as reminiscent of the late-1990’s, and an emerging sense that the worst of Tech spending headwinds is either behind us or close to that stage.
With many Tech companies on deck to report September-quarter results this week, the market will be looking for more color on business spending trends, particularly on the cloud side.
A big part of Tech’s improved earnings outlook over the last few months has been a function of more effective cost controls that have helped stabilize margins. Improved clarity on top-line trends will help solidify the nascent favorable revisions trend and undergird the group’s impressive stock market momentum.
On top of it all is the AI debate, where we have already seen direct revenue impact from the likes of Nvidia and some ideas from Microsoft. Still, the innovation’s productivity-enhancing potential appears to be off in the future.
The stock market is essentially a discounting system of the future. To the extent that we see viable business models in the days ahead that make use of AI and the so-called large language models, beyond Nvidia selling more capable chips, and Microsoft starting to charge for new AI-driven bells and whistles in its Office productivity suite, the stock market excitement would be totally justified.
These topics will be front and center in this week’s earnings reports from four of the ‘Big 7 Tech players’ - Alphabet and Microsoft after the market’s close on Tuesday (10/24), Instagram and WhatsApp parent Meta Platforms after the close on Wednesday (10/25) and Amazon after the market’s close on Thursday (10/27). Of the remaining three members of this ‘club,’ Tesla has reported already, and Apple and Nvidia are expected to report Q3 results on November 2nd and 15th, respectively.
As impressive as this stock market performance has been for these players, we can see that most of them essentially went sideways to down during Q3. Amazon has lost relatively more ground lately, mainly driven by the regulatory overhang in the wake of the Federal Trade Commission (FTC) lawsuit.
Digital advertising has historically been seen as core to Alphabet and Meta, but Amazon has also become a major player in the space. Ad spending stabilized during the last reported period (2023 Q2). Given the macroeconomic uncertainties, it will be interesting to see how these management teams see trends for the current and coming periods. This will also be at play in the Snap report, which reports Q3 results on Tuesday this week.
All of these companies are big players in the artificial intelligence (AI) space, with the Microsoft vs. Alphabet rivalry particularly intense. With the initial excitement around ChatGPT and other AI applications now behind us, the questions now center around how these AI capabilities will be monetized through new and existing business models. It is reasonable to expect each of these management teams to spend considerable time on their Q3 earnings calls discussing their AI plan.
The group is expected to bring in +34% more earnings relative to the same period last year on +10.9% higher revenues. Please note that these expectations have steadily increased as Q3 unfolded, with the current +34% earnings growth expectation up from +21.5% three months ago. As with Q3 estimates, earnings estimates for the last quarter of the year have also increased.
As we all know by now, the group’s phenomenal boost in 2021 partly reflected pulled forward demand from future periods that was in the process of getting adjusted last year and this year. As you can see above, the expectation is for the group to resume ‘regular/normal’ growth next year, but a lot of that is contingent on how the macroeconomic picture unfolds.
Beyond these mega-cap players, total Q3 earnings for the Technology sector as a whole are expected to be up +11.3% from the same period last year on +3.2% higher revenues.
As was the case with the ‘Big 7 Tech Players,’ the overall Tech sector has been dealing with pulled forward revenues and earnings during Covid over the last many quarters. In fact, earnings growth for the Zacks Tech sector turned positive only in the preceding quarter (2023 Q2) after remaining in negative territory during the four quarters prior.
This big-picture view of the ‘Big 7 players’ and the sector as a whole shows that the worst of the growth challenge is shifting into the rearview mirror.
This Week’s Notable Earnings Releases
Including all the earnings reports through Friday, October 20th, we now have Q3 results from 86 S&P 500 members. Total Q3 earnings for these 86 index members are up +1.9% from the same period last year on +5.8% higher revenues, with 79.1% beating EPS estimates and 61.6% beating revenues estimates.
The reporting cycle really ramps up this week, with more than 650 companies reporting Q3 results, including 160 S&P 500 members. In addition to the aforementioned Big Tech players, we have a representative cross-section of companies from all sectors coming out with results this week.
Companies are comfortably beating consensus EPS estimates but coming up a bit short on the revenue beats percentages. This becomes clearer when we look at the ‘blended’ beats percentage for Q3, which shows the proportion of these 86 index members that have beaten both EPS and revenue estimates.
The Earnings Big Picture
Looking at 2023 Q3 as a whole, the expectation currently is of S&P 500 earnings declining by -1.8% from the same period last year on +0.8% higher revenues. This would follow the -7.1% decline on +1.1% higher revenues in 2023 Q2.
2023 Q3 is expected to be the last period of declining earnings for the index, with positive growth resuming from 2023 Q4 onwards. In fact, had it not been for the Energy sector drag, earnings growth in 2023 Q3 would already be positive.
Look at current expectations for next year and the year after to understand the disconnect between the reality of current bottom-up aggregate earnings estimates and the seemingly never-ending worries about an impending economic downturn. That said, most economic analysts have been steadily lowering their recessionary odds in recent months.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>The Q3 Earnings Season Kicks Off Positively
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.