Investors are eagerly awaiting quarterly earnings reports from big tech names this week.
Despite the recent sell-off, many big tech names still have rich valuations. Investors will want to see those valuations justified by robust fundamentals during earnings reports this week.
Microsoft (MSFT) is set to report on Tuesday. META (META) will report Wednesday after the bell. Finally, Amazon.com (AMNZ) and Apple (AAPL) will report Thursday after market close.
These names are being closely watched after disappointing reports from Google parent Alphabet (GOOGL) and Tesla (TSLA) last week. Investors will be looking for more than just a strong showing on the top- and bottom-line, according to Christine Short, Head of Global Corporate Events Research, Wall Street Horizon, a TMX Company.
Short pointed to Alphabet’s results last week, as the company beat on the top- and bottom-line. However, a miss on YouTube advertising revenues sent the stock down 5% in the next session.
What to Keep an Eye on During Big Tech Earnings
For Microsoft, cloud revenues will be a top focus, Short said. Following Alphabet’s YouTube advertising revenue miss, META and Amazon’s advertising revenue growth will be in sharp focus.
For Apple, investors will likely be looking for signs that slowing sales in China hit a trough and are on their way to a rebound.
AI will be a key area of interest as investors digest earnings this week. Investors want to see if demand and excitement around AI will be able to lift tech stocks during the second half of the year, as it did in the first half (apart from the past month).
“I think any sort of indication that AI spending is softening would not bode well for this group,” Short said.
“There is very little room for error for these names, or for large cap names in general this earnings season,” she added.
Why This Earnings Season Is Different
Tech stocks have lifted the broader market most of the year. However, over the past several weeks, small-cap stocks have rotated back into favor. Recently, small-caps outperformed large-caps by the largest margin ever over a five-day period.
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Additionally, investors have been selling tech names and buying other sectors of the market. Tech earnings results could have a large impact on sector rotation. Disappointing results will likely serve as another growth driver for small caps and other segments of the market.
There is already a trend of markets punishing negative EPS surprises reported by S&P 500 companies more than average, while rewarding positive EPS surprises reported by S&P 500 companies less than average, according to FactSet..
Additionally, analysts set the bar high this quarter, and have not amended estimates. “Analysts usually ratchet down earnings estimates as the season gets closer, but that didn’t happen for Q2 2024,” Short said.
The majority of companies are still beating on the bottom-line, even above the long-run averages. However, they aren’t beating by as much as they typically do, which could signal more cost cutting on the horizon, Short said.
Revenues are a completely different story, according to Short. Only 60% of S&P 500 companies beating on the top-line, which is lower than long-run averages. This suggests companies are still able to cost-cut their way to EPS growth, and EPS growth is not necessarily being driven by robust sales.
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