With the list of headwinds for the stock market, from high interest rates to geopolitical concerns in the Middle East, investors hope that soon-to-be-released third-quarter earnings results from the mega-cap technology companies will boost market sentiment. The biggest U.S technology companies have slashed thousands of jobs and reduced costs, and investors hope the cost-cutting measures will begin to show up in earnings results, giving the overall market a much-needed boost.
The five biggest technology companies in the S&P 500 Stock Index ($SPX) (SPY) include Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), Microsoft (MSFT), and Nvidia (NVDA), which account for about 25% of the index’s market capitalization. According to Bloomberg Intelligence, their earnings are projected to jump +34% from a year earlier on average. However, earnings from the S&P 500 are expected to be down -5% without the earnings from the big-five technology company, and roughly unchanged including those tech companies.
Soaring interest rates have weighed on technology stocks this month, with the 10-year T-note yield climbing to its highest in 16 years. The surge in interest rates has sparked fears about a potential recession that has only been heightened by the conflict in the Middle East. However, some analysts expect earnings of the big technology companies to lift the market from its doldrums. Hodges Capital Management said, “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 headwinds facing stocks, the technology sector has outperformed the overall market. The five big-tech companies account for most of the S&P 500’s 13% advance this year. FBB Capital Partners said after robust Q2 earnings results, “we need to see more of the same in third-quarter results.” Given the weightings of the big five technology stocks, “you can bet that the rest of the market will play follow the leader as big tech earnings unfold this quarter,” and we see “fairly low odds of a tech earnings wreck this quarter.”
One potential roadblock to an earnings-fueled rally is concern that a lot of the anticipated good news may already be priced into the stocks. Nvidia’s share tripled this year, Alphabet and Amazon.com have gained more than 50%, and Apple and Microsoft have risen nearly 40%. Also, big tech stock valuations are still elevated. Apple and Microsoft are priced at 27- and 29-times estimated earnings, respectively, well above their 10-year averages. Expensive share prices put pressure on companies to deliver strong earnings, and Bokeh Capital Partners said, “Somebody needs to keep buying, and these rich valuations need to be justified.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
