Mega-Cap Tech Earnings in Focus this Week

The markets will look to quarterly earnings results this week from mega-cap technology stocks to show the extent of the recent profit slump.  The five biggest technology firms by revenue, Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), and Meta Platforms (META), are set to release their quarterly earnings results this week to lowered expectations.  Data compiled by Bloomberg show that earnings per share are projected to fall -22% from the same quarter last year, the most in three years.

This week’s earnings results from the mega-cap technology stocks may provide near-term directional hints for the broader market.  After the mega-cap tech stocks lost nearly $3 trillion in combined market value this year, the group’s rating in the S&P 500 is the lowest in more than two years. However, mega-cap tech stocks still account for about 20% of the S&P 500, more than the utilities, energy, and consumer sectors combined.

Despite this year’s decline in earnings, analysts are projecting that the profits of the mega-cap tech companies will rebound in the year ahead.  Bloomberg Intelligence said, “the consensus still expects a relatively rapid recovery in fundamentals to emerge next year.  However, if the companies can’t confirm this forecast, this important segment of the S&P 500 may finally capitulate.”

The group of five mega-cap tech stocks is expected to show the third consecutive quarter of falling profits, a sharp contrast from the previous two years when the stocks consistently posted solid double-digit growth.  Headwinds remain for mega-cap tech earnings.  The Fed remains committed to raising interest rates to combat inflation, which is punishing tech-share valuations because of the higher interest rate used to discount the present value of profits expected in the future. Also, the U.S. is exploring the possibility of more export controls, limiting China’s access to U.S. emerging technologies.

Despite the slump in technology valuations, many investors remain unconvinced that mega-cap stocks have hit a bottom and they are still focused on short positions.  The ratio of long positions to short positions in mega-cap technology stocks is lower than it’s been 98% of the time since 2018.  However, PriceWaterhouseCooper says, “for some companies, given their balance-sheet strength and market positions, it is hard to imagine them continuing to see the declines they’ve already had.”

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