Earnings Reports: Big Tech at Bat
Brace yourself for a busy and possibly volatile week. Five Silicon Valley heavy hitters are on the roster to report operating results: Alphabet (NSDQ: GOOGL), Microsoft (NSDQ: MSFT), and Apple (NSDQ: AAPL) on Tuesday; Facebook (NSDQ: FB) on Wednesday; and Amazon (NSDQ: AMZN) on Thursday. All five are scheduled to report after the closing bell. In addition, the Federal Reserve begins its two-day policy meeting Tuesday.
Conditions are ripe for earnings beats that provide a catalyst for the rally’s next leg up. But disappointments are likely to get harshly punished, creating a downdraft for the overall market. Plus, a few wrong words from the Fed could easily spook investors who continue to worry about inflation and monetary tightening.
The major U.S. stock market indices on Monday notched new record highs, as investors anticipated strong earnings from the tech titans. The Dow Jones Industrial Average jumped 82.76 points (+0.24%), the S&P 500 rose 10.51 points (+0.24%), and the tech-oriented NASDAQ climbed 3.72 points (+0.03%). The small-cap Russell 2000 rose 7.27 points (0.33%). In pre-market futures contracts Tuesday, stocks were trending lower.
For second-quarter 2021, with 24% of S&P 500 companies reporting actual results, 88% of S&P 500 companies have reported a positive earnings per share (EPS) surprise and 86% of S&P 500 companies have reported a positive revenue surprise. Companies in aggregate are posting earnings that are 19% above expectations. The numbers come from research firm FactSet.
For Q2 2021, the blended year-over-year EPS growth rate for the S&P 500 is 74.2%. “Blended” combines actual results for companies that have reported and estimated results for companies that have yet to report.
If 74.2% turns out to be the actual growth rate for Q2, it will represent the highest year-over-year earnings growth rate reported by the index since Q4 2009, at 109.1%. Analysts are getting progressively more optimistic. On June 30, the estimated earnings growth rate for Q2 2021 was 63.2%.
Reward and punishment…
Companies that have reported positive earnings surprises for Q2 2021 have enjoyed an average price increase of +0.8% two days before the earnings announcement through two days after the earnings release.
Companies that have reported negative earnings surprises for Q2 2021 have seen an average price decrease of -1.8% two days before the earnings release through two days after the earnings.
The blended net profit margin for the S&P 500 for Q2 2021 is 12.4%, which is above the five-year average net profit margin of 10.8% (see chart):
Nine sectors are reporting a year-over-year increase in their net profit margins in Q2 2021 compared to Q2 2020, led by the financials sector (21.3% vs. 8.6%).
These healthy profit margins bode well for the rest of the year. Higher net profit margins mean that companies are getting efficient at converting revenue into actual profits, despite rising inflation.
Last week, chipmaking stalwart Intel (NSDQ: INTC) crushed earnings expectations but guided for lower profit margins in the third quarter. The stock promptly fell.
To be sure, stocks are getting expensive. The S&P 500’s forward price-to-earnings ratio is 21.3, above the 10-year average of 16.2.
However, long-term projections are sanguine for the top and bottom lines of the S&P 500. For Q3 2021, analysts are projecting earnings growth of 26.2% and revenue growth of 13.4%. For Q4 2021, analysts are projecting earnings growth of 20.3% and revenue growth of 10.1%. For calendar year (CY) 2021, earnings growth is expected to come in at 38.9% and revenue growth at 13.3%. On tap for CY 2022 is earnings growth of 10.3% and revenue growth of 6.7%.
To be sure, equity valuations surpass historical norms, but the market can persist in this fashion for a long time. You’ll recall that in late 1996, then-Federal Reserve Chief Alan Greenspan famously reproached investors for their “irrational exuberance.” However, it took more than three additional years for the bull market to eventually peak.
What’s more, the dot.com bust of 2000 was triggered by the collapse of overly hyped technology companies with little or no earnings. You can’t make that argument today about Silicon Valley, which is flush with cash and poised for even greater profits in the post-COVID economy.
Unless the Federal Reserve rains on Wall Street’s parade this week (which is unlikely), stocks are on track to notch further gains.
Editor’s Note: Underlying conditions remain bullish for stocks. However, if you’re looking to mitigate risk, consider high-quality dividend stocks.
Dividend-payers are time-proven vehicles for long-term wealth building, but they’re also safe havens because companies with robust dividends boast the strongest fundamentals. For our list of the best high-yielders, click here.
John Persinos is the editorial director of Investing Daily. Send your questions or comments to firstname.lastname@example.org. To subscribe to his video channel, follow this link.