Analysts estimate that in the third quarter, the profits of the technology "Five Golden Flowers" are expected to increase by an average of 34% compared with the same period last year, thus once again leading the market's rise. But one potential obstacle is that high valuations may have priced in the good news, and companies need to achieve strong profits to gain confidence among stock market investors. Earnings reports from technology giants will begin to be released this week. As concerns about U.S. stocks seem to be growing day by day, investors are pinning their hopes on large technology companies, hoping to see good news about their performance during this earnings season.
Netflix and Tesla are scheduled to release technology-related earnings reports on Wednesday, Google parent company Alphabet, Microsoft, Amazon and Meta will release earnings next week, Apple will release on November 2, and Nvidia will release on November 21.
The current expectation is that technology's "five golden flowers" will prop up the S&P 500's earnings. After cutting thousands of jobs to reduce costs, America's largest technology companies are generating profits similar to two years ago, when people sharply increased demand for digital services and electronic equipment during the epidemic.
Apple, Microsoft, Alphabet, Amazon and NvidiaThey are the five largest companies in the S&P 500, accounting for about a quarter of the index's total market capitalization. Bloomberg said that analysts estimate that the profits of these five companies in the third quarter are expected to increase by an average of 34% compared with the same period last year.
The overall earnings of the S&P 500 index constituent stocks do not look that strong and are expected to be basically flat, but without these five giants, the index's earnings level will face a decline of about 5%. The market expects Five Golden Flowers' earnings to help make up for weakness in sectors such as energy and healthcare.
Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, said:
"The performance of Big Tech stocks is very important and can broadly boost market sentiment. Wall Street expects that all these companies will have good earnings. Big Tech stocks have all the conditions to lead the market in the final quarter of the year."
This month, technology stocks have been faltering. The surge in U.S. bond yields has made the market uneasy. The rebound in inflation and the conflict in the Middle East have intensified concerns about the U.S. economic recession. The Nasdaq 100 index, which is dominated by technology stocks, has fallen for two consecutive months.
However, the Nasdaq still far outperformed the overall market. Five major Big Tech companies have accounted for most of the S&P 500's 13% gain this year.
Mike Bailey, director of research at asset management firm FBB Capital Partners, said that after strong second-quarter results, "we need to see more of the same in third-quarter results." Given their heavy weighting, "you can bet that as the big tech company results are released this quarter, the rest of the market will follow the leaders."
Potential obstacles: High valuations may have digested the good news, but instead put pressure on companies to make strong profits.
Analysts pointed out that a potential obstacle to stock market gains driven by earnings reports is that much of the expected good news may have been priced in. Alphabet and Amazon are up more than 50% this year, while Apple and Microsoft are up nearly 40%.
In addition to rising earnings expectations, these big tech stocks are benefiting from bets on generative AI. Nvidia shares have tripled this year, but the company is the only company to get a big financial boost from the trend so far this year.
Investors are concerned that big tech companies' valuations remain high even with their recent share price declines. Apple and Microsoft trade at about 27 and 29 times earnings, respectively, well above the average over the past 10 years. For the S&P 500 as a whole, the number is about 18.
Kim Forrest, founder and chief investment officer of investment bank Bokeh Capital Partners, said expensive stock prices have put pressure on companies to achieve strong profits.
Forrest said in an interview with the media:
“They have to keep delivering on their performance promises or they lose investor attention and someone needs to keep buying in and these high valuations need to be justified.”
Compared with the previous earnings season, investors are more confident that U.S. companies are about to end their year-long profit decline. However, a fragile economic outlook, wary consumers and the highest interest rates in sixteen years mean stocks may only be getting a temporary reprieve.
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, said the outlook for S&P 500 companies should finally improve slightly in the third quarter, but the recovery remains fragile and lacks breadth.
Adams said that while estimate revisions have gained momentum, margins outside the energy sector "need to remain firm" and the outlook for cycle-sensitive sectors needs to "improve" for stock market investors to gain confidence.
However, this confidence may be increasingly difficult to obtain. High interest rates are pinching consumers and businesses alike, and even luxury goods makers such as LVMH are warning of slowing consumer demand after a strong performance amid high inflation. The Israeli-Palestinian conflict could also roil the global economy.