Technology stocks have lost some of their shine in recent days, with some blaming underwhelming earnings reports as the source of weakness. A good example in that respect is Microsoft’s (MSFT) stock market weakness after its earnings release.
There is the case of Intel (INTC) as well, which has literally been taken to cleaners after coming out with its quarterly release. But the chipmaker has long been in a league of its own when it comes to missing out on market opportunities and disappointing the markets. As such, considering it in the same league as Microsoft, even though the two were in the vanguard of the PC era together, may be a little unfair.
Handicapping how Tech stocks would perform after they release quarterly results is a timely exercise as we enter the heart of the Q2 earnings season this week with marquee operators like Apple (AAPL), Facebook (FB), Amazon (AMZN), Alphabet (GOOGL) and others on deck to report results this week.
As we look ahead to earnings releases from these Tech leaders, we should be mindful of the group’s outstanding stock market performance thus far. We show below the year-to-date performance of the Zacks Technology sector (blue line) and the S&P 500 index (red line), with a number of these stocks thrown in the mix.
As you can see above, the sector has been leading the overall market in a major way (+14.3% vs. +0.6%), with Microsoft and Apple performing almost twice as good as the Tech sector.
So what was wrong with the Microsoft earnings report when it beat EPS and revenue estimates?
Some people cite signs of deceleration in the company’s cloud computing business, with Azure revenues growing only +50% vs. +54% in the preceding quarter. Overall Q2 earnings and revenues for the company were up +5.5% and +12.8% from the same period last year. Even Intel had Q2 earnings and revenues up +10.3% and +19.5% year over year.
These would be solid growth numbers in any period, but they become even more impressive when we put them in the broader context that Q2 earnings and revenues for the S&P 500 index as a whole are on track to be down in excess of -40% and -10% from the same period last year.
What I am saying is that the ‘problem’ isn’t in the Microsoft or Tech numbers, but rather in how these stocks have moved since the March 23rd lows. Market participants are simply using the quarterly reports as an opportunity to cash out of these very profitable positions.
I would expect something similar to play out as the market digests quarterly releases from Apple, Facebook, Amazon, Alphabet and others.
Tech Sector Scorecard
For the Tech sector, we now have Q2 results from 35.1% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Tech companies are down -5.2% on +1% higher revenues, with 93.3% beating EPS estimates and 66.7% beating revenue estimates.
The comparison charts below put these results in a historical context and go some ways towards showing that the sector’s Q2 results appear to be out of sync with what’s plaguing all the sectors during the Covid-19 pandemic.
The first set of comparison charts is of the Q2 earnings and revenue growth rates.
The second set of comparison charts shows Q2 EPS and revenue beats percentages in the context of recent history.
Q2 Earnings Season Scorecard
As of Friday, July 24th, we have seen Q2 results from 128 S&P 500 members or 25.6% of the index’s total membership. The reporting cycle really ramps up this week, with more than 800 companies on deck to report results, including 185 S&P 500 members. In addition to the aforementioned Tech companies, we have companies from all the other sectors, including Energy sector leaders Exxon (XOM) and Chevron (CVX).
Total Q2 earnings for the 128 index members that have reported results already are down -41.9% from the same period last year on -7.1% lower revenues, with 74.2% beating EPS estimates and 64.1% beating revenue estimates.
The two sets of charts below put the results from these 128 companies in a historical context. The first set of comparison charts compare the earnings and revenue growth rates.
The second set of charts compare the proportion of beats %.
The summary table below shows Q2 expectations in the context of what we saw in the preceding period.
As you can see above, all sectors are expected to have lower earnings relative to the year-earlier period, with 4 of the 16 sectors expected to lose money in Q2 (decline rates in excess of -100%). These four sectors are unsurprisingly Energy (Q2 earnings expected to decline -147.7%), Transportation (-155.3%), Autos (-228.1%) and Consumer Discretionary (-117.7%).
The Overall Earnings Picture
The current state of consensus earnings expectations is captured in the following charts.
The first chart shows how estimates for 2020 Q3 have evolved over the last few weeks. Please note that this chart offers the best evidence of a favorable turnaround in the overall earnings picture if it can be sustained through the remainder of this earnings season.
The second chart shows how S&P 500 earnings estimates for full-year 2020 have evolved since early January. As you can see below, the expectation was for a roughly +8% growth at the start of the year, which has now become a decline of -23.6%.
Importantly, the favorable revisions trend that is so obvious in the first chart can be seen here as well, with today’s decline of -23.6% down from -24.4% in early July.
The third chart takes a big-picture view of S&P 500 quarterly expectations, with earnings and revenue growth expectations for the next four quarters contrasted with actuals for the preceding four periods; expectations for 2020 Q2 have been highlighted.
The fourth chart provides the big-picture view on an annual basis.
As you can see above, growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +26.6% relative to 2020 estimates. But as strong as next year’s growth estimate is, total 2021 index earnings would still haven’t gotten back to pre-Covid levels.
In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level, as the fifth chart below shows.
These numbers translate to an index ‘EPS’ of $155.38 in 2021 vs. $122.78 in 2020 and $160.72 in 2019.
The above chart clearly shows the enormous blow to earnings that this pandemic has turned out to be. But take a look at the below chart for the Technology sector and you get some sense of the sector’s earnings power.
For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Early Signs of Earnings Improvement
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