Yearning for earnings
Forget the Big Media drama and focus on Big Tech results
It was a tumultuous day for the traditional media business. But unless you’re a diehard cable news junkie or investor in Fox, NBCUniversal owner Comcast or, like me, CNN parent company Warner Bros. Discovery (I own shares of WBD in my 401(k) as a former CNN Business employee) then it’s probably best to ignore the media melodrama and look instead to the upcoming results from some titans of technology.
Amazon, Microsoft, Facebook/Instagram/WhatsApp owner Meta Platforms and Google and YouTube parent company Alphabet are all on tap to report their first quarter earnings this week.
So far this year, the broader market (and the tech sector in particular) has done extremely well despite concerns about inflation, the Federal Reserve’s interest rate hikes and the possibility of a recession sometime this year or next. The S&P 500 has gained nearly 8% in 2023 while the Nasdaq has surged 15%. (The Dow is up only 2%. But it has just 30 stocks and isn’t really as important as it once was, given that this is the 21st century. That’s a Substack post for another time though.)
Are investors being too glib? Earnings for the first quarter probably won’t look too hot. According to estimates tracked by FactSet, profits for the S&P 500 are expected to fall 6.2% from a year ago. That would be the worst quarterly earnings report card for Corporate America since the second quarter of 2020, when profits plunged more than 30% as the economy ground to a standstill due to the Covid-19 pandemic. What’s more, revenue is estimated to rise just 2.1%.
The picture doesn’t look much better for the second quarter either. Analysts are projecting a 5% drop in earnings and that revenue will dip slightly as well.
So why is the market rallying? Investors appear to be hoping that the second half of the year will be better. And for what it’s worth, profits are expected to increase in both the third quarter and fourth quarter. But those are the current estimates. Will earnings actually wind up rising this year? Color me skeptical.
That’s why investors should pay extremely close attention to what executives at Amazon, Microsoft, Meta and Alphabet have to say about macroeconomic conditions. Are consumers still spending? What about advertisers? If this quartet of momentum stocks disappoints Wall Street with their outlooks, look out below.
This market isn’t exactly cheap. FactSet points out that the S&P 500 is trading at 18.2 times earnings estimates for the next 12 months. That’s above the 10-year average P/E ratio of 17.3. You’d expect the market to be valued at a premium when investors are enthusiastic about economic prospects. This is not one of those times.