Investors will sift through corporate earnings representing around $10 trillion in market value this week as the first quarter reporting season kicks-in to high gear, but none are likely to have more impact than the quartet of big tech updates expected over the next four days.
Microsoft (MSFT), Google parent Alphabet (GOOGL), Meta Platforms (META) and Amazon (AMZN) are all slated to report March quarter earnings this week, starting after the close of trading on Tuesday, as investors look to ignite a range-bound stock market into an early spring rally.
Big tech, in fact, has been critical to the S&P 500's year-to-date gains, with just five stocks -- Apple (AAPL), Microsoft, Google, Meta and Nvidia (NVDA) -- driving nearly two-thirds of the benchmark's 8% advance, despite representing only around a fifth of its market cap. The Nasdaq, meanwhile, has risen more than 16.2% so far this year.
The gains have come, interestingly, amid a surge in Treasury bond yields, which have tracked the Federal Reserve's anticipated rate path, as well as broader concerns over the strength of the domestic economy, global advertising spending and a pullback in consumer discretionary spending.
'Tech Stocks the New Safety Trade': Wedbush's Ives
"Tech stocks have become the new safety trade with Big Tech names a major beneficiary of this dynamic," said Wedbush analyst Dan Ives.
"The combo of massive cash balances and free cash-flow potential, significant cost cutting underway in the Valley led by Meta, Microsoft, Amazon, Google and others, conservative guidance already given in the January earnings season 'rip the Band- Aid off moment,' and tech fundamentals that are holding up in a shaky macro are setting up for a green light for tech stocks in our opinion," he added.
Cost-cutting has certainly proved key in many of the Big Tech advances, launched in part by Meta's move to eliminate more than 11,000 jobs as part of what CEO Mark Zuckerberg described at the time as a 'year of efficiency' in 2023.
Since then, the sector has lead the pace of U.S. job cuts, with around 40% of all reported layoffs over the first three months of the year linked to tech companies, according to the most recent Challenger, Gray & Christmas report. The pace is likely to top the total annual tally recorded during the collapse of the dot-com bubble in 2001.
Amazon, in fact, planned additions to that tally last week, with moves to pare hundreds of jobs at Whole Foods, the upscale grocery store chain it purchased for $13.7 billion in 2017, over the coming months.
Amazon will report its first-quarter earnings on Thursday, with analysts looking for a bottom line of 21 cents a share on revenue of $124.5 billion.
Meta, the parent of Facebook, Instagram and WhatsApp, is forecast to post first-quarter earnings of $2.03 a share, down 25% from last year, with revenue roughly flat at $27.62 billion.
"Many of the tech giants spent 2022 ‘cleaning house’ and getting rid of factors weighing on earnings, so we expect to see some positive reports this week," said Nigel Green of London-based deVere Group.
“The earnings will highlight which companies have been able to maintain margin. In this environment of higher rates for longer than had previously been anticipated, some companies have found it difficult to maintain margin, others have done well," he added. "But due to the difficult work done last year, Big Tech is likely to provide some decent earnings."
Tech Ramps Up AI Efforts
Costs aren't the only theme investors will focus on, however, as tech companies will also need to ramp-up investments in, and articulate plans for, the AI arms race. That competition has captured the industry's attention since the launch of the large-language model ChatGPT resource earlier this year.
Microsoft, which reports its third quarter earnings after the close of trading on Tuesday, unveiled plans in February to embed a newer version of ChatGPT, a tool that uses human language to process instructions, in both its Edge internet browser and Bing search engine over the coming months.
Investors are betting that AI adoption will help Microsoft -- which generated just $3.2 billion in search revenue last year -- challenge the market dominance of Google, which churned around $43 billion.
"Only two months after its launch in late November, ChatGPT had 100 million monthly active users in January," deVere Group's Green noted. "To put this into context, it took Instagram 2 1/2 years to get to 100 million.
“Therefore, the pressure is on for all tech titans to ramp up their AI divisions,' he added.
Google, which also reports after the close of trading on Tuesday, has been testing an array of new search products for several months -- including the test launch of an AI-based tool called Bard last month -- and is also focused on adding AI features that would support work-related products such as Gmail.
Meta is also likely to hype the potential of AI in both Reels, its short-form video content challenge to TikTok that sits within Instagram, and its Advantage+ shopping campaign, which adds AI power to its Facebook marketplace.
Google is expected to post a bottom line of $1.07 a share, down 13% from last year, on revenue of $68.84 billion.
Analysts expect a bottom line of $2.23 for Microsoft, a tally that is largely flat to last year, with revenue in the region of $51 billion.
The stock's near-term moves, however, are likely to be powered by growth in its Azure cloud division, which slowed to 31% year-over-year in the prior quarter. Microsoft forecast March quarter revenue for its intelligent cloud division of between $21.7 billion and $22 billion, a tally that missed Wall Street estimates.
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Collectively, Big Tech earnings could underpin market conviction -- in either direction -- over the coming weeks. Investors will be pricing in next month's Fed rate hike while tracking developments on inflation, the banking sector, and the chances of a near-term recession, according to LPL Financial's chief global strategist, Quincy Krosby.
"Last quarter, the market was forgiving with weaker earnings, as long as cost-cutting measures were included with guidance. Margins will be analyzed, particularly as Tesla came under pressure as its margins were compressed more than expected," she said.
"This week could be the beginning of the final round of the push-pull skirmish between the market and economic trends."
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