Tech Giants Face Mixed Earnings Results as Market Dynamics Shift

Analyzing the Magnificent 7’s Performance

Chicago, IL – November 4, 2024 – Zacks.com announces its latest list of companies that may surprise investors with their earnings. This week’s highlighted firms include Apple (AAPL), Microsoft (MSFT), Meta (META), Alphabet (GOOGL), and Amazon (AMZN).

So far, three members of ‘The Magnificent 7’ stocks—the ones that have reported their September-quarter results—revealed disappointing outcomes: Apple, Microsoft, and Meta. In contrast, Alphabet and Amazon received positive reviews, while Tesla impressed the market significantly.

These mixed results suggest the end of a previous trend where ‘The Magnificent 7’ led the market confidently. Unlike last year and early this year, this group’s dominance now appears to be fading.

Yet, it’s important to recognize that many of these companies still demonstrate robust growth. While Apple seems to have shifted away from rapid growth, the remaining members of the Magnificent 7 are continuing to show strong performance now and into next year.

For instance, Apple reported Q3 earnings that beat expectations, with an +8.8% increase from the previous year, totaling nearly $25 billion, paired with revenues climbing +6.1% to almost $95 billion. Despite its slower growth compared to peers like Amazon and Alphabet, Apple maintains a significant market presence that is difficult for competitors to challenge.

On the other hand, Microsoft experienced +10.7% growth in Q3 earnings alongside a +16% increase in revenues. Meta’s earnings rose +35.4% backed by an +18.9% boost in revenue, with both companies surpassing estimates.

If there are critiques to be made, it would be regarding slight decelerations in Microsoft’s cloud segment and Meta’s advertising revenue. Are these the main concerns, or is there a broader narrative at play?

The answer lies in the extensive investments Microsoft and Meta are making towards artificial intelligence (AI). These companies are channeling substantial resources into AI infrastructure—more than many market watchers anticipated.

Microsoft and Meta are not isolated in this AI push; Alphabet and Amazon are equally committed to hefty investments in AI. Conversely, Apple lags in this regard, though it is beginning to emphasize AI capabilities in future software updates. Unlike Apple, which primarily services consumers, the other Magnificent 7 focus their AI innovations on business applications.

Both Alphabet and Amazon have successfully illustrated how their AI expenditures impact current and future growth. However, Microsoft and Meta struggled to convey this message.

There is no reason to suspect that these well-managed firms are misallocating funds into unworthy projects. Investing in their future AI strategies should solidify their leadership positions in an increasingly AI-driven market. Given this context, it seems excessive for the market to be overly fixated on capital expenditures.

Looking at the broader picture, the overall earnings for Q3 in the Technology sector are expected to rise +19.3% over last year’s figures, supported by +11.4% higher revenues. Had Intel not faced significant issues this quarter, the growth for the sector could have reached +30.5%.

Q3 Earnings Performance Overview

As of November 1st, 350 members of the S&P 500, representing 70% of the index, have reported their earnings. With 104 companies set to report this week, results from over 90% of the index’s members will soon be available.

Collectively, these 350 firms have posted earnings growth of +8.8% compared to last year, along with +5.7% higher revenues. Approximately 74.9% of these companies have exceeded earnings per share (EPS) estimates, while 60.6% have outperformed revenue expectations.

Notably, 50.3% of reporters have surpassed both EPS and revenue targets. While the growth trend remains stable, fewer firms are beating estimates than in previous periods. The current percentages of EPS and revenue beats are trailing behind the 20-quarter average, with revenue beats at a low for the same timeframe.

Understanding the Broader Earnings Landscape

Overall, combining reported results with anticipated figures, the total earnings for the S&P 500 are projected to rise by +6.8% from the prior year, driven by +5.4% higher revenues.

The Energy and Tech sectors are influencing the earnings trajectory in opposite ways; the Energy sector negatively impacts growth while the Tech sector enhances it.

Without the Energy sector’s drag, S&P 500 earnings could have climbed +9.2% instead of +6.8%. Excluding the Tech sector’s contribution, growth for the remaining index would be just +2% rather than +6.8%.

Without including the Magnificent 7, the remaining 493 S&P 500 firms would only see earnings up by +1.3% instead of +6.8%.

Looking ahead to Q4 2024, overall S&P 500 earnings are set to increase by +7.7% compared to last year, with +4.4% higher revenues predicted.

Unlike the significant estimate cuts observed before Q3 earnings began, Q4 estimates are holding strong.

This year’s +7.5% earnings growth would rise to +9.5% when excluding the Energy sector.

For a comprehensive overview of the earnings landscape and upcoming expectations, refer to our weekly Earnings Trends report >>>>Tech Flexes Earnings Power: A Closer Look

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