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Tech stocks have been standout performers in the market this year. Driving this momentum has been a combination of favorable developments on the macro front, primarily growing clarity surrounding the Fed’s tightening cycle, optimism about the impact of artificial intelligence (AI) that some view warily as reminders of the late 1990s, and an emerging sense that the worst of Tech spending headwinds is either behind us or close to that stage.
With many Tech companies on deck to report June-quarter results this week, the market will be looking for more color on business spending trends, particularly on the cloud side. A big part of Tech’s improved earnings outlook over the last few months has been a function of more effective cost controls that have helped stabilize margins.
Improved clarity on top-line trends will help solidify the nascent favorable revisions trend and undergird the group’s impressive stock market momentum.
Surrounding it all is the AI debate, where we have already seen direct revenue impact from the likes of Nvidia and some ideas from Microsoft. Still, the innovation’s productivity-enhancing potential appears to be some ways off in the future.
That said, the stock market is essentially a discounting system of the future. To the extent that we see viable business models in the days ahead that make use of AI, the so-called large language models beyond Nvidia selling more capable chips, and Microsoft starting to charge for new AI-driven bells and whistles in its Office productivity suite, the stock market excitement would be totally justified.
These topics will be front and center in this week’s earnings reports from three of the ‘Big 7 Tech players.’ Alphabet and Microsoft report after the market’s close on Tuesday (7/25), and Instagram parent Meta Platforms reports after the close on Wednesday (7/26). Of the remaining four members of this ‘club,’ Tesla has reported already, and Amazon, Apple, and Nvidia are not reporting this week.
Digital advertising has historically been seen as core to Alphabet and Meta, but Amazon has steadily become a major player in the space as well. Ad spending likely remained stable in Q2, but it will be interesting to see how these management teams see trends for the current and coming periods, given the macroeconomic uncertainties. This will also be in play in the Snap report, which also reports Q2 results on Tuesday (7/25) this week.
All of these companies are big players in the artificial intelligence (AI) space, with the Microsoft vs. Alphabet rivalry particularly intense. With the initial excitement around ChatGPT and other AI applications now behind us, the questions now center around how these AI capabilities will be monetized through new and existing business models. It is reasonable to expect each of these management teams to spend considerable time on their Q2 earnings calls on their AI plan.
The ‘Big 7 Tech Players’ as a whole for the current and coming periods in the context of what they achieved in the preceding period is expected to have +14.7% higher earnings in 2023 Q2 on +8% higher revenues. This would follow the -2.5% drop in earnings on +4.9% higher revenues in 2023 Q1.
Please note that the +14.7% earnings growth and +8% revenue growth in Q2 today is up from +4% earnings growth and +4.3% revenue growth expected for the group three months back. As with Q2, estimates for full-year 2023 have notably increased as well.
The group’s phenomenal boost in 2021 partly reflected pulled forward demand from future periods that was in the process of getting adjusted last year and this year. As you can see above, the expectation is for the group to resume ‘regular/normal’ growth next year, but a lot of that is contingent on how the macroeconomic picture unfolds.
Beyond these mega-cap players, total Q2 earnings for the Technology sector as a whole are expected to be down -4.4% from the same period last year on -0.1% lower revenues.
This big-picture view of the ‘Big 7 players’ and the sector as a whole shows that the worst of the growth challenge is shifting into the rearview mirror.
Please note that the -1.9% earnings decline expected for the sector is less than half of the -4.8% decline expected three months back.
The Earnings Big Picture
Regular readers of our earnings commentary know that we have consistently been flagging a favorable turn in the revisions trend since the start of 2023 Q2, with earnings estimates stabilizing in the aggregate after consistently coming down for almost a year and actually starting to go up for some key sectors.
This combination of favorable macroeconomic developments and optimism about the transformational power of artificial intelligence (AI) appears to be driving market optimism.
Q2 is on track to be the third quarter in a row of earnings declines and the first quarter of declining revenues. We should point out here that 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 -2.9% on +3.1% higher revenues. 2023 Q2 will be the 6th consecutive quarter of declining margins for the S&P 500 index.
Margins in Q2 are expected to be below the year-earlier level for 12 of the 16 Zacks sectors, with the biggest margin pressure expected to be in the Basic Materials, Construction, Energy, Medical, Conglomerates, Autos, Aerospace, and Tech sectors.
On the positive side, the Finance sector is the only one expected to experience significant margin gains, with the Consumer Discretionary and Transportation sectors as distant second and third. Sectors expected to be essentially flat regarding margins relative to 2022 Q2 are Retail, Utilities, and Industrial Products.
As noted earlier, the estimate revisions trend has notably stabilized since the start of Q2. In the aggregate, S&P 500 earnings estimates for 2023 have declined -1.2% since the beginning of April but only -0.3% on an ex-Energy basis. Importantly, estimates for sectors like Tech, Construction, Autos, and Transportation have increased in that timeframe.
Q2 Earnings Scorecard
We get into the heart of the Q2 earnings season, with more than 650 companies on deck to report results, including 165 S&P 500 members or one-third of the index’s total membership. With results from 89 index members already out through Friday, July 21st, we will have crossed the halfway mark in the Q2 reporting cycle by the end of this week.
Total Q2 earnings for the 89 S&P 500 members are up +3.4% from the same period last year on +8.5% higher revenues, with 78.7% beating EPS estimates and 60.7% beating revenue estimates.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Q2 Earnings Season Gets Off to a Positive Start
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Nvidia, Alphabet, Meta, Snap and Microsoft are part of Zacks Earnings Preview
For Immediate Release
Chicago, IL – July 24, 2023 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Nvidia (NVDA - Free Report) , Alphabet (GOOGL - Free Report) , Meta Platforms (META - Free Report) , Snap (SNAP - Free Report) and Microsoft (MSFT - Free Report) .
Will Big Tech Earnings Keep the Rally Going?
Tech stocks have been standout performers in the market this year. Driving this momentum has been a combination of favorable developments on the macro front, primarily growing clarity surrounding the Fed’s tightening cycle, optimism about the impact of artificial intelligence (AI) that some view warily as reminders of the late 1990s, and an emerging sense that the worst of Tech spending headwinds is either behind us or close to that stage.
With many Tech companies on deck to report June-quarter results this week, the market will be looking for more color on business spending trends, particularly on the cloud side. A big part of Tech’s improved earnings outlook over the last few months has been a function of more effective cost controls that have helped stabilize margins.
Improved clarity on top-line trends will help solidify the nascent favorable revisions trend and undergird the group’s impressive stock market momentum.
Surrounding it all is the AI debate, where we have already seen direct revenue impact from the likes of Nvidia and some ideas from Microsoft. Still, the innovation’s productivity-enhancing potential appears to be some ways off in the future.
That said, the stock market is essentially a discounting system of the future. To the extent that we see viable business models in the days ahead that make use of AI, the so-called large language models beyond Nvidia selling more capable chips, and Microsoft starting to charge for new AI-driven bells and whistles in its Office productivity suite, the stock market excitement would be totally justified.
These topics will be front and center in this week’s earnings reports from three of the ‘Big 7 Tech players.’ Alphabet and Microsoft report after the market’s close on Tuesday (7/25), and Instagram parent Meta Platforms reports after the close on Wednesday (7/26). Of the remaining four members of this ‘club,’ Tesla has reported already, and Amazon, Apple, and Nvidia are not reporting this week.
Digital advertising has historically been seen as core to Alphabet and Meta, but Amazon has steadily become a major player in the space as well. Ad spending likely remained stable in Q2, but it will be interesting to see how these management teams see trends for the current and coming periods, given the macroeconomic uncertainties. This will also be in play in the Snap report, which also reports Q2 results on Tuesday (7/25) this week.
All of these companies are big players in the artificial intelligence (AI) space, with the Microsoft vs. Alphabet rivalry particularly intense. With the initial excitement around ChatGPT and other AI applications now behind us, the questions now center around how these AI capabilities will be monetized through new and existing business models. It is reasonable to expect each of these management teams to spend considerable time on their Q2 earnings calls on their AI plan.
The ‘Big 7 Tech Players’ as a whole for the current and coming periods in the context of what they achieved in the preceding period is expected to have +14.7% higher earnings in 2023 Q2 on +8% higher revenues. This would follow the -2.5% drop in earnings on +4.9% higher revenues in 2023 Q1.
Please note that the +14.7% earnings growth and +8% revenue growth in Q2 today is up from +4% earnings growth and +4.3% revenue growth expected for the group three months back. As with Q2, estimates for full-year 2023 have notably increased as well.
The group’s phenomenal boost in 2021 partly reflected pulled forward demand from future periods that was in the process of getting adjusted last year and this year. As you can see above, the expectation is for the group to resume ‘regular/normal’ growth next year, but a lot of that is contingent on how the macroeconomic picture unfolds.
Beyond these mega-cap players, total Q2 earnings for the Technology sector as a whole are expected to be down -4.4% from the same period last year on -0.1% lower revenues.
This big-picture view of the ‘Big 7 players’ and the sector as a whole shows that the worst of the growth challenge is shifting into the rearview mirror.
Please note that the -1.9% earnings decline expected for the sector is less than half of the -4.8% decline expected three months back.
The Earnings Big Picture
Regular readers of our earnings commentary know that we have consistently been flagging a favorable turn in the revisions trend since the start of 2023 Q2, with earnings estimates stabilizing in the aggregate after consistently coming down for almost a year and actually starting to go up for some key sectors.
This combination of favorable macroeconomic developments and optimism about the transformational power of artificial intelligence (AI) appears to be driving market optimism.
Q2 is on track to be the third quarter in a row of earnings declines and the first quarter of declining revenues. We should point out here that 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 -2.9% on +3.1% higher revenues. 2023 Q2 will be the 6th consecutive quarter of declining margins for the S&P 500 index.
Margins in Q2 are expected to be below the year-earlier level for 12 of the 16 Zacks sectors, with the biggest margin pressure expected to be in the Basic Materials, Construction, Energy, Medical, Conglomerates, Autos, Aerospace, and Tech sectors.
On the positive side, the Finance sector is the only one expected to experience significant margin gains, with the Consumer Discretionary and Transportation sectors as distant second and third. Sectors expected to be essentially flat regarding margins relative to 2022 Q2 are Retail, Utilities, and Industrial Products.
As noted earlier, the estimate revisions trend has notably stabilized since the start of Q2. In the aggregate, S&P 500 earnings estimates for 2023 have declined -1.2% since the beginning of April but only -0.3% on an ex-Energy basis. Importantly, estimates for sectors like Tech, Construction, Autos, and Transportation have increased in that timeframe.
Q2 Earnings Scorecard
We get into the heart of the Q2 earnings season, with more than 650 companies on deck to report results, including 165 S&P 500 members or one-third of the index’s total membership. With results from 89 index members already out through Friday, July 21st, we will have crossed the halfway mark in the Q2 reporting cycle by the end of this week.
Total Q2 earnings for the 89 S&P 500 members are up +3.4% from the same period last year on +8.5% higher revenues, with 78.7% beating EPS estimates and 60.7% beating revenue estimates.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Q2 Earnings Season Gets Off to a Positive Start
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.