Can tech giants deliver in bumper earnings week?

A surge in tech valuations means the bar is set high for this week’s results, when 45% of the S&P 500 is due to report. Will the robust earnings season continue?

An earnings season that’s so far kept pace with Wall Street expectations hits top gear tonight when Google owner Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) post first-quarter results.

The duo are among the 180 companies representing close to 45% of the S&P 500 market capitalisation due to report figures over the course of this week.

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Facebook owner Meta Platforms (NASDAQ:META) posts figures after Wednesday’s closing bell followed by Amazon (NASDAQ:AMZN).com the next evening and oil giants Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) on Friday.

So far, the start of the S&P 500’s results season has been better relative to the last two quarters, although FactSet adds that the number of companies reporting positive earnings surprises and the magnitude of these upsides are still below their five-year averages. 

The blended earnings decline for the S&P 500 is 6.2%, which will mark the largest fall by the S&P 500 index since the second quarter of 2020.

Looking ahead, FactSet said analysts are projecting an earnings decline of 5% in the second quarter as margins continue to be squeezed by cost pressures. However, growth is forecast to return through third and fourth quarter improvements of 1.6% and 8.5% respectively.

This is despite fears that the lagged effects of recent Federal Reserve rate hikes will become more pronounced later in the year.

The optimism for an end of year recovery has lifted demand for stocks across the tech sector, meaning the likes of Amazon and Microsoft will deliver their earnings reports with the bar set high following share price rises of 24% and 17% in 2023. A rebound for Meta has seen its shares jump by well over 65%.

They are among the 10 stocks responsible for driving about 80% of the year-to-date returns for the S&P 500 index. 

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While investors tend to see the tech sector as having downturn protection because of its growth drivers, Bank of America warns that history shows that the industry has been more cyclical than the S&P 500 based on the frequency of sales declines.

It added: “A pull forward in demand during Covid and a potential reversal of globalisation cost savings suggest tech earnings may be both cyclically and secularly challenged.

“About 20% of IT spend is estimated to be derived from financial services companies, now under pressure to shore up capital.“

Financial stocks have dominated the reporting season so far, with their largely mixed set of results attracting heightened interest due to the recent banking sector turmoil.

Large-cap banks generally saw deposit inflows driven by a "flight to safety”, while credit trends have been in line with expectations. However, several lenders have increased provisions due to the recessionary outlook and some smaller players have put share buybacks on hold.

Overall, UBS Global Wealth Management said the current earnings season may not be a negative catalyst for the market. However, with the S&P 500 trading on a forward valuation of 18 times earnings it believes the scope for upside appears limited.

The bank added: “We expect equities to be range-bound in the near term as the market oscillates between the soft-landing and recession narratives.”