The tech sector has faced challenges in the last three months due to rising interest rates and the perceived long duration of tech stocks. This has resulted in a loss of momentum in the market. However, some tech giants have managed to outperform the broader market. Microsoft and Amazon, in particular, have reported strong Q3 earnings, reaffirming their earnings power. On the other hand, Alphabet seems to be faltering in the cloud and AI space.
Looking at the broader picture, the “Big 7 Tech Players” group, which includes Apple, Meta, Tesla, Nvidia, Amazon, Microsoft, and Alphabet, is expected to achieve a 49% earnings growth in Q3 2023 on a 12.2% increase in revenues. This positive growth from the tech sector has helped improve the overall Q3 earnings growth rate for the S&P 500 index, which is now expected to increase by 1.2% from the same period last year.
While the tech sector as a whole has been dealing with the challenges of the COVID-19 pandemic, it has shown positive earnings growth in recent quarters. Q3 earnings for the sector are expected to be up 18.6% from the same period last year on a 4% increase in revenues. This indicates that the worst of the growth challenge is shifting into the rearview mirror.
Looking at the overall earnings picture, the expectation for 2023 Q3 is for S&P 500 earnings to grow by 1.2% from the same period last year, with a corresponding increase of 1.2% in revenues. This follows a decline of 7.1% in earnings in Q2. Despite concerns about an impending economic downturn, current expectations for next year and the year after show positive growth.
Earnings Season Update
As of October 27th, Q3 earnings results have been released by 246 S&P 500 members, accounting for 49.2% of the index’s total membership. Total Q3 earnings for these companies are up 6% from the same period last year on a 2.1% increase in revenues. The majority of these companies (79.3%) have beaten EPS estimates, while 64.2% have beaten revenue estimates.
The coming week will see more than 1,100 companies reporting Q3 results, including notable names like Apple, Airbnb, Shopify, and Qualcomm. Earnings and revenue growth rates at this stage are comparable to historical trends, with companies comfortably beating EPS estimates but falling slightly short on revenue beats percentages.
The Future Outlook
Looking ahead to future periods, earnings growth is expected to continue. The chart below highlights the year-over-year Q3 earnings and revenue growth rates in the context of recent quarters and future expectations.
Excluding the Energy sector, earnings growth for Q3 improves further to 6.6%. This positive trend is expected to continue into future quarters as well. On an annual basis, the chart below shows the earnings and revenue growth picture.
While there may be concerns about economic downturns, the current bottom-up aggregate earnings estimates and future expectations for next year and beyond show positive growth. Economic analysts have been steadily lowering their recessionary odds, further indicating a positive outlook for the tech sector and the overall market.
To read more about the overall earnings picture and expectations for the coming periods, check out our weekly Earnings Trends report. The report provides a comprehensive analysis of the earnings landscape and offers valuable insights for investors.
Conclusion
The tech sector has faced challenges in recent months due to rising interest rates and the long duration of tech stocks. However, some tech giants have managed to outperform the broader market, reaffirming their earnings power. The earnings growth for the Big 7 Tech Players group and the tech sector as a whole is a positive sign for the overall market. Looking ahead, earnings growth is expected to continue, providing further confidence in the market’s long-term prospects.
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