We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Technology Sector Market Gains Are Driven by Fundamentals
Read MoreHide Full Article
A notable feature of the Q2 earnings season, the bulk of which is now behind us, has been the absence of widespread negative guidance that a section of the market has persistently been afraid of.
This ‘fear’ has been a regular feature of the discourse around the last few quarterly reporting cycles and is part of the broader hard-landing narrative for the U.S. economy. We are not discussing the merits or otherwise of this view, though we have to acknowledge that this narrative has been losing some of its shine lately.
As we have noted before, earnings aren’t great, but they aren’t bad either. Importantly, the absence of all-around downbeat guidance is showing in a stable earnings outlook, which in some respects has actually started improving lately. Last week, we referred to this emerging favorable trend as ‘green shoots’ on the broader earnings front.
We are continuing with this ‘green shoots’ narrative by zeroing in on the Tech sector. The importance of the Tech sector to the broader market, as well as the earnings question, likely needs no explanation. But we should add here that the Zacks Tech sector is expected to bring in 26.7% of the S&P 500 index’s total earnings over the next four quarters, which compares to the second-place Finance sector’s 18.3% earnings share.
The chart below takes a big-picture view of the Tech sector’s earnings on a quarterly basis.
Image Source: Zacks Investment Research
Looking at 2023 Q2 for the space, the Zacks Tech sector is on track to bring in $119.6 billion for the period vs. $117.5 billion in the year-earlier period. The +1.7% year-over-year growth is the first positive growth reading for the Tech sector after four back-to-back declines.
You can also see in the above chart that the sector is currently expected to bring in $121 billion in 2023 Q3 (it is actually $121.1 billion), up from $112 billion in 2022 Q3 for a +7.6% year-over-year earnings growth rate.
Please note that the $121.1 billion in aggregate Q3 Tech sector earnings expected today are up from $118.6 billion on June 27th or the start of the period. In other words, analysts have been raising their Q3 estimates for Tech sector companies in their coverage.
The chart below shows the sector’s earnings picture on an annual basis.
Image Source: Zacks Investment Research
You can see here that Tech companies have been ‘atoning for’ the Covid bump of 2021 when earnings jumped more than +40% in a single year.
The $484.2 billion the sector is expected to bring in 2023 will be down -0.5% from the 2022 level. Sector earnings were down -3.4% in 2022.
Even more important than this context is the path that the aggregate 2023 earnings estimate for the sector has followed. The chart below tracks this path since January 2022.
Image Source: Zacks Investment Research
This chart shows that Tech sector earnings peaked in April 2022 and started coming down through February 2023 and have been steadily moving higher since then.
Regular readers of Zacks earnings and market commentary know that we strongly believe in the power of earnings estimate revisions. We are always looking for follow-through in the earnings outlook for any price movement in the stock.
As such, see the above positive revisions trend in Tech sector earnings as the key fundamental driver and support of the group’s positive stock market momentum this year.
Alphabet’s current 2023 EPS estimate of $5.64 is up from $5.39 on June 30th and $5.10 on March 31st. You can see this in the chart below.
Image Source: Zacks Investment Research
This favorable turn in the revisions trend is even more pronounced for Meta and Nvidia, as you can see in the Meta Price & Consensus chart below.
Image Source: Zacks Investment Research
Tech Sector Earnings Scorecard
We now have results from 80.9% of the Zacks Tech sector’s market capitalization in the S&P 500 index. Total Q2 earnings for these Tech companies are down -2.3% from the same period last year on -0.2% lower revenues, with 82.8% beating EPS estimates and 79.3% beating revenue estimates.
The comparison charts below put the Tech sector’s Q2 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
As you can see here, the EPS beats percentage is tracking above what we had seen from this group of companies in the last three quarters, but is otherwise below the average for the previous 20 quarters. Revenue beats are tracking below what we had seen in the preceding quarter but remain modestly above the historical average.
The Q2 earnings decline of -2.3% for this group of companies compares to -13.1% in 2023 Q1, -19.1% in 2022 Q4, -13.8% in 2022 Q3, and -9.1% in 2022 Q2. Earnings growth for this group of Tech companies was in positive territory prior to 2022 Q3. In other words, earnings growth still remains negative, but the magnitude of declines has been decelerating, with the Q2 earnings decline the smallest for this group of companies in the past year.
Q2 Earnings Scorecard
As of Friday, August 4th, we have seen Q2 results from 423 S&P 500 members, or 84.6% of the index’s total membership. We have over 1000 companies reporting results this week, including 36 S&P 500 members. The notable companies reporting this week include Berkshire Hathaway, UPS, Disney, Ralph Lauren, and others.
Total Q2 earnings for the 423 S&P 500 members are down -9.7% from the same period last year on +0.19% higher revenues, with 79.4% beating EPS estimates and 65.5% beating revenue estimates.
The comparison charts nevertheless put the Q2 results from these 423 index members with what we had seen from the same group of companies in other recent periods.
Image Source: Zacks Investment Research
The comparison charts below put the Q2 earnings and revenue growth rates for these 423 index members in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
The chart below shows current earnings and revenue growth expectations for the S&P 500 index for 2023 Q2, the following three quarters, and actual results for the preceding four quarters.
Image Source: Zacks Investment Research
Please note that the -9.2% decline for Q2 earnings on -0.2% lower revenues is the blended growth picture for the quarter, which combines the actual results that have come out with estimates for the still-to-come companies.
As you can see in this chart, Q2 is on track to be the third quarter in a row of earnings declines and the first quarter of declining revenues. As noted earlier, a big part of the earnings and revenue weakness is due to the Energy sector.
Excluding the Energy sector drag, Q2 earnings would be down -1.4% on +4.2% higher revenues.
The chart below shows the year-over-year change in net income margins for the S&P 500 index.
Image Source: Zacks Investment Research
As you can see above, 2023 Q2 will be the 6th quarter in a row of declining margins for the S&P 500 index.
Margins in Q2 are expected to be below the year-earlier level for 6 of the 16 Zacks sectors, with the biggest margin pressure expected to be in the Energy, Medical, Basic Materials, and Construction sectors.
With the earnings focus lately on the Tech sector, it is instructive to see how much distance has been covered on the margins front in this key sector.
Image Source: Zacks Investment Research
The chart below shows the earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Earnings Estimates Reflect Stabilization
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Technology Sector Market Gains Are Driven by Fundamentals
A notable feature of the Q2 earnings season, the bulk of which is now behind us, has been the absence of widespread negative guidance that a section of the market has persistently been afraid of.
This ‘fear’ has been a regular feature of the discourse around the last few quarterly reporting cycles and is part of the broader hard-landing narrative for the U.S. economy. We are not discussing the merits or otherwise of this view, though we have to acknowledge that this narrative has been losing some of its shine lately.
As we have noted before, earnings aren’t great, but they aren’t bad either. Importantly, the absence of all-around downbeat guidance is showing in a stable earnings outlook, which in some respects has actually started improving lately. Last week, we referred to this emerging favorable trend as ‘green shoots’ on the broader earnings front.
We are continuing with this ‘green shoots’ narrative by zeroing in on the Tech sector. The importance of the Tech sector to the broader market, as well as the earnings question, likely needs no explanation. But we should add here that the Zacks Tech sector is expected to bring in 26.7% of the S&P 500 index’s total earnings over the next four quarters, which compares to the second-place Finance sector’s 18.3% earnings share.
The chart below takes a big-picture view of the Tech sector’s earnings on a quarterly basis.
Image Source: Zacks Investment Research
Looking at 2023 Q2 for the space, the Zacks Tech sector is on track to bring in $119.6 billion for the period vs. $117.5 billion in the year-earlier period. The +1.7% year-over-year growth is the first positive growth reading for the Tech sector after four back-to-back declines.
You can also see in the above chart that the sector is currently expected to bring in $121 billion in 2023 Q3 (it is actually $121.1 billion), up from $112 billion in 2022 Q3 for a +7.6% year-over-year earnings growth rate.
Please note that the $121.1 billion in aggregate Q3 Tech sector earnings expected today are up from $118.6 billion on June 27th or the start of the period. In other words, analysts have been raising their Q3 estimates for Tech sector companies in their coverage.
The chart below shows the sector’s earnings picture on an annual basis.
Image Source: Zacks Investment Research
You can see here that Tech companies have been ‘atoning for’ the Covid bump of 2021 when earnings jumped more than +40% in a single year.
The $484.2 billion the sector is expected to bring in 2023 will be down -0.5% from the 2022 level. Sector earnings were down -3.4% in 2022.
Even more important than this context is the path that the aggregate 2023 earnings estimate for the sector has followed. The chart below tracks this path since January 2022.
Image Source: Zacks Investment Research
This chart shows that Tech sector earnings peaked in April 2022 and started coming down through February 2023 and have been steadily moving higher since then.
Regular readers of Zacks earnings and market commentary know that we strongly believe in the power of earnings estimate revisions. We are always looking for follow-through in the earnings outlook for any price movement in the stock.
As such, see the above positive revisions trend in Tech sector earnings as the key fundamental driver and support of the group’s positive stock market momentum this year.
We can see this in bellwether Tech stocks like Alphabet (GOOGL - Free Report) , Meta (META - Free Report) , Nvidia (NVDA - Free Report) , and others.
Alphabet’s current 2023 EPS estimate of $5.64 is up from $5.39 on June 30th and $5.10 on March 31st. You can see this in the chart below.
Image Source: Zacks Investment Research
This favorable turn in the revisions trend is even more pronounced for Meta and Nvidia, as you can see in the Meta Price & Consensus chart below.
Image Source: Zacks Investment Research
Tech Sector Earnings Scorecard
We now have results from 80.9% of the Zacks Tech sector’s market capitalization in the S&P 500 index. Total Q2 earnings for these Tech companies are down -2.3% from the same period last year on -0.2% lower revenues, with 82.8% beating EPS estimates and 79.3% beating revenue estimates.
The comparison charts below put the Tech sector’s Q2 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
As you can see here, the EPS beats percentage is tracking above what we had seen from this group of companies in the last three quarters, but is otherwise below the average for the previous 20 quarters. Revenue beats are tracking below what we had seen in the preceding quarter but remain modestly above the historical average.
The Q2 earnings decline of -2.3% for this group of companies compares to -13.1% in 2023 Q1, -19.1% in 2022 Q4, -13.8% in 2022 Q3, and -9.1% in 2022 Q2. Earnings growth for this group of Tech companies was in positive territory prior to 2022 Q3. In other words, earnings growth still remains negative, but the magnitude of declines has been decelerating, with the Q2 earnings decline the smallest for this group of companies in the past year.
Q2 Earnings Scorecard
As of Friday, August 4th, we have seen Q2 results from 423 S&P 500 members, or 84.6% of the index’s total membership. We have over 1000 companies reporting results this week, including 36 S&P 500 members. The notable companies reporting this week include Berkshire Hathaway, UPS, Disney, Ralph Lauren, and others.
Total Q2 earnings for the 423 S&P 500 members are down -9.7% from the same period last year on +0.19% higher revenues, with 79.4% beating EPS estimates and 65.5% beating revenue estimates.
The comparison charts nevertheless put the Q2 results from these 423 index members with what we had seen from the same group of companies in other recent periods.
Image Source: Zacks Investment Research
The comparison charts below put the Q2 earnings and revenue growth rates for these 423 index members in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
The chart below shows current earnings and revenue growth expectations for the S&P 500 index for 2023 Q2, the following three quarters, and actual results for the preceding four quarters.
Image Source: Zacks Investment Research
Please note that the -9.2% decline for Q2 earnings on -0.2% lower revenues is the blended growth picture for the quarter, which combines the actual results that have come out with estimates for the still-to-come companies.
As you can see in this chart, Q2 is on track to be the third quarter in a row of earnings declines and the first quarter of declining revenues. As noted earlier, a big part of the earnings and revenue weakness is due to the Energy sector.
Excluding the Energy sector drag, Q2 earnings would be down -1.4% on +4.2% higher revenues.
The chart below shows the year-over-year change in net income margins for the S&P 500 index.
Image Source: Zacks Investment Research
As you can see above, 2023 Q2 will be the 6th quarter in a row of declining margins for the S&P 500 index.
Margins in Q2 are expected to be below the year-earlier level for 6 of the 16 Zacks sectors, with the biggest margin pressure expected to be in the Energy, Medical, Basic Materials, and Construction sectors.
With the earnings focus lately on the Tech sector, it is instructive to see how much distance has been covered on the margins front in this key sector.
Image Source: Zacks Investment Research
The chart below shows the earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Earnings Estimates Reflect Stabilization