Big Tech Earnings Should Keep S&P 500 Going

We have finally see the stock market staying green in most of the trading sessions, but investors have already start to look at the earnings season for a dose of good news as list of stock-market worries growing seemingly by the day,

I would say investors might be hanging their hopes on a familiar group: Big Tech. As we have heard news of thousands of jobs was slashed to cut costs, we would be seeing the biggest US technology and internet companies pumping out profits. We could see a similar scenarios which happened two years ago during the pandemic, the period sent sales of digital services and electronic devices soaring.

Market is looking to see if the Big Tech can help to pick up the slack from industries like energy and health care that are still mired in an earnings slump.

Their earnings are projected to jump 34% from a year earlier on average, according to analyst estimates compiled by Bloomberg Intelligence. The S&P 500 as a whole is not looking nearly as strong. The index’s profits are expected to be roughly flat, but they would face a drop of around 5% without those five behemoths.

Regardless of the Q1 earnings results and the market’s reaction, we think the full-year 2024 earnings trajectory is more important to long-term investors. And here a notable, positive shift is taking place.

The consensus forecast expects earnings growth for the technology-oriented Magnificent 7 stocks (the “haves” for over a year in terms of earnings growth and share price performance) to decline meaningfully in 2024 mainly due to very challenging year-over-year comparisons. This is not a negative development—it’s common following ultra-strong growth. In contrast, earnings growth for non-Magnificent 7 stocks (the “have nots” for much of 2023) is expected to pick up—finally.

The two growth rates should nearly converge to around 14 percent by Q4 2024, which would be well-above average. And from FactSet, we could see that Price should move positively correlated to the EPS (12 month)

This lends credence to the fact that market performance has broadened since late October 2023. Prior to that time, the Magnificent 7 stocks within the Information Technology, Communication Services, and Consumer Discretionary sectors dominated in share price performance. These stocks and sectors rallied sharply as earnings growth prospects and results surged.

However, since the October low, five S&P 500 sectors that don’t include any Magnificent 7 stocks have climbed 17 percent or more and all 11 sectors have risen by double digits. In other words, the market has been anticipating the earnings growth convergence between the haves and have nots, and this has been reflected by the broad rally over the past five months.

If we look at the sector within S&P 500, comms service and information looks to lead the Q1 2024 revenue growth, and this week earnings would be in focus, and we might see S&P 500 breaking new highs again.

We need to understand that when we look at 2024 earnings estimates, the consensus expectations are still back-end loaded, this could be a challenge as the estimates for S&P 500 earnings in the second half of the year look lofty.

If we think the 2024 earnings growth trajectory is highly dependent on GDP growth staying resilient, near or above the 2.6 percent long-term average and without negative inflation or employment developments. While this scenario is possible, economic vulnerabilities linger, and recession risks should not be ignored.

If big tech earnings and Friday’s inflation data disappoint, that could extend the duration and depth of this current stock market correction. While it is possible the stock market has further room to decline, we remain constructive on stocks for 2024.

If we look at the percentage of S&P 500 company with Q2 positive and negative guidance, we can see clearly that healthcare, materials and consumer discretionary does not fare so well, and we could see that information and S&P 500, industrials also have their fair share of negative guidance.

While we looked forward to the big tech earnings this week, there is something that we need to be aware, the outlook guidance for Q2 2024 and whole of 2024 would be important as well, there are some challenges from the economic data, geopolitical and US presidential election.

This could be factors that might shift the macro to a new period, and we could be seeing negative corporate sentiment, and this could be a catalyst for sharply lower estimates in early 2024.

Appreciate if you could share your thoughts in the comment section whether you think big techs could help to keep S&P 500 going in first half of 2024?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.