By Nick Colas of DataTrek
US corporate earnings season is fast approaching, and Big Tech’s announcements will be key to the market’s direction. Wall Street has been cutting numbers for some names (GOOG, AMZN) and not raising estimates for AAPL, MSFT or FB. The good news is that the Street expects every Big Tech company to print Q3 results that are BELOW Q2 actuals. That’s likely too pessimistic; 2019, for example, saw no seasonality between Q2 and Q3. Big Tech may not be Q4 leadership (cyclicals should be), but they should be no impediment to a market rally later in the quarter.
We have been saying Q3 US corporate earnings season should be a bright spot that counteracts an otherwise troubled equity market narrative, so today we will discuss upcoming Big Tech earnings. Add up the S&P 500 weightings for Apple (6.0 percent), Microsoft (5.8 pct), Google (4.3 pct), Amazon (3.8 pct) and Facebook (2.1 pct) and you have 22 percent of the index. How markets respond to earnings reports from these 5 companies matters just about as much as the combined impact of announcements from the Industrials, Consumer Staples, Energy, Real Estate, Materials and Utilities sectors (a combined 24 pct of the S&P).
Let’s start with the most important point: Big Tech has not been immune from the recent trend of Wall Street analysts cutting their Q3 earnings estimates that we’ve been talking about every Sunday for the last month. Numbers have come down for Amazon and Google, and have remained only constant for Apple, Microsoft, and Facebook. As the following 30/60-day earnings revision trends show, Amazon has seen its Q3 expectations slashed over the last 2 months, Facebook’s Q3 estimates actually rose, and Q3 estimates for Google, Apple and Microsoft are basically unchanged:
- Apple: $1.23/share expected, +$0.01 over the last 60 days, flat over the last 30 days
- Microsoft: $2.07/share expected, +$0.01 over the last 60 days, flat over the last 30 days
- Google: $23.40/share expected, +$0.07 over the last 60 days, but -$0.08 over the last 30 days
- Amazon: $8.92/share expected, -$4.02/share over the last 60 days, -$0.09 over the last 30 days
- Facebook: $3.17/share expected, +$0.22 over the last 60 days, flat over the last 30 days
Now, the funny thing about all these estimates is that in every single case they are lower than what these companies reported in Q2 2021. That fits the oddity we’ve also been mentioning in our weekly earnings updates: Wall Street analysts are expecting the S&P 500 to print lower aggregate Q3 earnings ($49/share) than actual Q2 results ($53/share).
That has struck us as excessively pessimistic in a cyclical recovery (even if it has been slowing through Q3), and Big Tech’s Q3 2021 earnings expectations when compared to how quarterly earnings typically trend between Q2 and Q3 supports that view:
- Apple’s $1.23 Q3 estimate is lower than Q2’s actual $1.30. In 2019, the company reported $0.55/share (split adjusted) in Q2 and $0.76/share in Q3, so seasonality doesn’t seem to be an issue for Apple’s quarterly earnings progression.
- Microsoft’s $2.07 Q3 estimate is lower than Q2’s actual $2.17/share. As with Apple’s 2019 results, MSFT saw no drop from Q2 ($1.37/share) to Q3 ($1.38) in that year.
- Google’s $23.40 Q3 estimate is meaningfully lower than Q2’s actual $27.26. In 2019 the company took a charge for a regulatory fine, but its operating earnings were essentially unchanged from Q2 to Q3 ($9.9 billion in each quarter).
- Amazon’s $8.92 Q3 estimate is well below Q2’s actual of $15.21. That is a 41 percent drop, and perhaps correct given the incremental costs the company faces. But the Q2 to Q3 2019 earnings progression was $5.22 to $4.23, only a 19 percent decline.
- Facebook’s $3.17 Q3 estimate is also far below Q2’s actual of $3.61. In 2019, Q3 saw earnings increase, to $2.12, from $1.99 in Q2.
Takeaway (1): you can see why US Big Tech has had a tough slog in the last month (flat/down Q3 earnings expectations), but estimates seem too low just based on what these companies reported for Q2. Seasonality doesn’t explain the expected drop, nor do economic factors. Now, that doesn’t mean Big Tech can be market leaders over the balance of the year; our “Pandemic Peacetime” paradigm points to other, more cyclical, groups playing that role. But nor should they embarrass themselves when they report Q3 results and take the market down with them.
Takeaway (2): going from the “micro” of 5 companies’ earnings reports to the “macro” of what this says about US large cap stocks, we think markets broadly agree with our point that Q3 earnings reports will surprise meaningfully to the upside. That’s why the S&P 500 is only off 4 percent from its early September highs despite cuts to earnings estimates, a slowing US economy, a de facto announcement of Fed bond purchase tapering and 2022 rate hikes, not to mention DC’s recent debt limit wrangling. That’s good and bad news, because it put all the market’s eggs in one basket. For that reason, we expect market volatility to continue at least until more than half the S&P 500 has reported (i.e., late in the month).