Tech giants’ earnings tsunami

On Thursday we have probably the most crucial set of earnings releases for this second quarter. Alphabet (Google’s parent company), Amazon, Apple and Facebook all update the markets after the US close. The reason this is so important is that these four tech giants, along with Microsoft, have dramatically outperformed the broader market since the beginning of this year. To put some figures on this, these five stocks account for over 20% of the value of the S&P 500 by market capitalisation. In addition, while the S&P 500 is effectively unchanged since January, Alphabet, Amazon, Apple, Facebook and Microsoft are up more than 30% combined. That means that the remaining 495 stocks are having a negative effect on the index. In other words, it is these five tech giants that are the focus for investors – not because they represent good value necessarily, but because of their considerable upside momentum. Speculators continue to buy them on the ‘fear of missing out’ combined with a deep-seated belief that the US Federal Reserve will always be there to pump liquidity into the market.

But some analysts are beginning to whisper words of warning about the valuations of these companies, and that appears to be reflected by recent price action. Earlier this month, the stock prices of these five all hit record highs. That represented stunning gains off the March lows with Alphabet up 57%, Amazon up 100%, Apple up 88%, Facebook up 82% and Microsoft up 63%. All have fallen back since then by between 4-7%, just as the second quarter earnings season kicked into gear. Now we’re approaching the half-way stage in the season and, so far, around 80% of S&P 500 companies have beaten analysts’ forecasts. However, forecast expectations were low, and overall S&P 500 earnings have fallen more than 40% from this time last year with the coronavirus pandemic taking a big bite out of corporate profits.

Last week Microsoft posted results that were largely positive, although its shares have, along with the other big tech stocks, fallen back. But they still remain little more than 6% off their record highs hit earlier this month. Other ”tech” favourites like Tesla, Netflix and Twitter have also lost ground recently.  Netflix slumped over 9% last Thursday after earnings came in below expectations and weak guidance was given for the coming quarter. Tesla’s earnings were also below expectations, but sales were stronger than forecast. Also, Tesla booked its fourth consecutive quarter of profits making it eligible for consideration for inclusion into the S&P 500 index – something which would widen the company’s popularity with investors. Despite this, the stock fell sharply after the earnings release. Twitter posted revenues that came in below expectations. But the share price got a boost as data showed strong growth in users. This followed on from the Bitcoin scam hack which affected a number of high-profile users including US presidential candidates Joe Biden and Kanye West, former president Barak Obama and Tesla CEO Elon Musk.

But now it’s the turn of the remaining big five to report. Just last week leading investment bank Goldman Sachs said that Apple's stock price is "unsustainable" and warned that the company may refrain from offering forward guidance for the September quarter. They blamed uncertainty around Covid-19 and the potential for a delay for the next iPhone launch. Meanwhile, Alphabet’s revenue growth rate has declined ever since the third quarter of 2019. Some analysts are warning of further disappointment this time round. Adding to the uncertainty, on Wednesday the heads of all four companies appeared before the House Antitrust Subcommittee investigating the market dominance of online platforms. Amazon and Facebook have been in policymakers’ sights for years now due to concerns over the monopolistic nature of both companies, and issues over customer data.

So far, the giant tech companies have managed to push back against a raft of charges and recommendations that they be broken up. Time will tell if policymakers are able to rein in the worst excesses of such powerful corporations. But past encounters have shown the resilience of the tech giants, and that’s something that investors continue to put their faith in.

For anyone looking to trade these market-dominating corporations, , it’s worth noting that all are available as Mini-Markets. By dividing our dealing price by ten, we’ve slashed the initial margin required to trade these shares. This also reduces their volatility, making a Mini-Market trade a much less scary proposition than the full-blown version. You can find out more about Mini-Markets by visiting our website.

So, Thursday’s earnings releases are a big deal for investors and what happens could help decide overall market direction over the next month or so. As we approach the big moment make sure to follow all the social media buzz. We have included all of the Big Four in our ‘Highlights 27th – 31st’ Smart News feed which you can find on our trading platform. This collates all this week’s top financial news topics so you can find all the key social media posts in one place, helping you keep a step ahead of the mainstream.

 

David Morrison

 

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