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A small group of technology giants have fueled U.S. stock-market gains this year, creating high anticipation for their soon-to-be-released earnings reports.
“There is a lot riding on Big Tech earnings this week, and the names reporting have a near term track record of delivering disappointing results,” said Nicholas Colas, co-founder of DataTrek Research, in a note Tuesday. These companies “largely missed estimates” over the last four quarters yet their outperformance this year suggests their first-quarter earnings results will all beat expectations, said Colas.
Big Tech stocks have driven 86% of the S&P 500’s performance so far this year, according to the note, citing seven stocks including Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
Google parent Alphabet Inc.
GOOGL,
, Amazon.com Inc.
AMZN,
Nvidia Corp.
NVDA,
Facebook parent Meta Platforms Inc.
META,
and Tesla Inc.
TSLA,
Most of these companies will report their first-quarter earnings this week and next.
Microsoft, Alphabet, Meta and Amazon — together representing 41 percent of the S&P 500’s gains this year — will all report their earnings this week.
Earnings Watch: As Big Tech determines the course of Wall Street, here is why Amazon will hold the most sway
Results for Apple, whose 7.1% weight in the S&P 500 index
SPX,
is the largest among Big Tech companies, will be released next week, according to the note.
“Except for Apple, Big Tech has been missing estimates on a consistent basis over the last year,” said Colas. “That is hardly a surprising observation given these names’ terrible performance last year.”
The S&P 500, a gauge of U.S. large-cap stocks, was up around 7.8% this year through Monday, according to FactSet data. That’s after slumping in 2022 as the Federal Reserve aggressively raised interest rates to battle high inflation.
Big Tech companies have been “holding up” U.S. large-caps stocks in 2023, said Colas. “Without them, the S&P 500 would only be up 1.1 percent on the year.”
‘Concentration risk’ in growth ETF
The combined weight of Apple and Microsoft in the Russell 1000 Growth index
RLG,
is nearing 25%, posing a risk for investors in exchange-traded funds that track the index, according to a Strategas report Tuesday.
“Each individual weight is over 10%, the first time two names have held that kind of influence in the benchmark using 28-years of data,” said Todd Sohn, an ETF strategist at Strategas, in the report. “On one hand, continued strength from up the scale can benefit passive ETF investors, but on the other, concentration risk continues to grow.”
Shares of the iShares Russell 1000 Growth ETF
IWF,
have jumped around 12% so far this year, according to FactSet data, at last check. But this month, the fund is down around 1.7% based on Tuesday afternoon trading levels.
With corporate-earnings season under way for the first quarter, 79% of the 124 companies in the S&P 500 that have reported so far have beat analyst expectations, according to an emailed note Tuesday from Refinitiv. That compares with 66% of companies historically beating estimates in a typical quarter based on data since 1994, the note says.
Recession?
Abigail Watt, a research economist at abrdn, said in a phone interview that she’s anticipating a recession in the U.S. later this year. A recession is “likely necessary to quell inflation pressures in the economy,” said Watt.
In her view, the Fed will probably raise its benchmark rate by a quarter percentage point at its policy meeting next week. But that’s likely to be its last hike, based on abrdn’s view the economy will slow through the second quarter and potentially enter a recession in the third quarter, she said.
The Conference Board said Tuesday that its consumer confidence index fell in April. “Consumers became more pessimistic about the outlook for both business conditions and labor markets,” said Ataman Ozyildirim, senior director of economics at The Conference Board, in the statement.
U.S. stocks were trading down Tuesday afternoon, with the Dow Jones Industrial Average
DJIA,
falling 1% while the S&P 500
SPX,
shed 1.4% and the tech-heavy Nasdaq Composite
COMP,
dropped 1.7%, according to FactSet data, at last check.
