In the face of numerous challenges, ranging from surging interest rates to geopolitical uncertainties in the Middle East, investors are pinning their hopes on the forthcoming third-quarter earnings results from mega-cap technology companies to reinvigorate market sentiment. Major U.S. technology giants have executed cost-cutting measures, including significant job reductions, and now investors anticipate that these efforts will begin to reflect in earnings, potentially providing the market with a much-needed lift.
The five largest technology companies in the S&P 500 Stock Index, namely Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Nvidia (NASDAQ:NVDA), collectively contribute approximately 25% of the index’s total market capitalization. According to Bloomberg Intelligence, these tech giants are expected to report a remarkable +34% increase in earnings compared to the same period a year ago. In contrast, without the earnings of these major tech players, the S&P 500 is predicted to show a -5% decline, and its earnings will remain largely unchanged even when including these tech giants.
Rising interest rates have placed downward pressure on technology stocks, particularly this month, with the 10-year T-note yield reaching its highest level in 16 years. The uptick in interest rates has sparked concerns about a potential recession, a sentiment further amplified by the Middle East conflict. Nevertheless, some analysts believe that the earnings reports from the tech giants could reinvigorate the market. Hodges Capital Management emphasized the significance of big tech delivering solid results, stating, “It’s very important for the big tech stocks to deliver. The Street expects earnings to be good across the board, and the mega-cap technology stocks have whatever it takes to lead the market in the final quarter of the year.”
Despite the various challenges facing the stock market, the technology sector has consistently outperformed the broader market. The five leading tech companies have been responsible for most of the S&P 500’s 13% gain this year. FBB Capital Partners noted the need for a continuation of strong earnings, stating that the weight of these Big Five tech stocks implies that the rest of the market will likely follow their lead as their earnings are unveiled this quarter. They also mentioned that there is a low probability of a tech earnings debacle this quarter.
However, there’s a potential hurdle to an earnings-driven market rally, as there is concern that much of the anticipated good news may already be priced into the stocks. Nvidia’s shares have tripled this year, while Alphabet and Amazon.com have gained over 50%, and Apple and Microsoft have risen nearly 40%. Furthermore, the valuations of these big tech stocks remain elevated, with Apple and Microsoft trading at 27- and 29-times estimated earnings, respectively, significantly above their 10-year averages. Such lofty share prices place substantial pressure on companies to deliver strong earnings, and the onus is on them to justify these premium valuations, as noted by Bokeh Capital Partners.
Featured Image: Freepik @ jcomp
Author Faith Yakubu