Tech Giants Face Mixed Q3 Earnings: Insights from the Magnificent 7

Chicago, IL – November 4, 2024 – Zacks.com has unveiled a list of companies that may surprise investors with their earnings this week. Featured on the list are Apple AAPL, Microsoft MSFT, Meta META, Alphabet GOOGL, and Amazon AMZN.

Analyzing Earnings from the Magnificent 7

Out of the six members of ‘The Magnificent 7’ that have released their September-quarter results, market reactions were mixed. Three companies—Apple, Microsoft, and Meta—saw their stocks decline, whereas Alphabet and Amazon received a more favorable response. Tesla, among its peers, posted strong results and gained investor approval.

These mixed results suggest a shift away from the unbroken market leadership that the Magnificent 7 enjoyed throughout last year and early this year. A new landscape seems to be emerging, marking the end of their previous dominance.

Nevertheless, it is essential to recognize the continuous growth potential within the remaining Magnificent 7 stocks. Most of these companies are still exhibiting solid growth metrics. Excluding Apple—which appears to be transitioning from a growth company—the other members of the Magnificent 7 are expected to sustain strong growth in revenues and profits well into next year and possibly beyond.

Take Apple’s performance as an example: the company surpassed consensus estimates, with Q3 earnings rising by 8.8% year-over-year to nearly $25 billion, alongside a 6.1% revenue increase to around $95 billion. While it may not maintain the same growth range as rivals like Amazon, Alphabet, or Meta, Apple’s market strength and consumer loyalty remain formidable.

In contrast, Microsoft reported a 10.7% rise in Q3 earnings, with revenues escalating by 16%. Meta’s earnings soared 35.4% against an 18.9% revenue increase. Both firms exceeded projections on profits and sales.

Some analysts might point to slowing cloud revenue growth for Microsoft and advertising revenue deceleration for Meta as potential areas of concern. However, the ongoing investments each company is making in artificial intelligence (AI) raise significant questions about the nature of these results.

Both Microsoft and Meta are committing large sums toward AI infrastructure, a strategy that underscores their readiness for a future where AI dominates businesses. Their peers, Alphabet and Amazon, are also investing heavily in AI development, demonstrating that they are not alone in this pursuit.

Apple, lagging in this respect, has begun to highlight AI features in upcoming software upgrades, which will be available primarily to users with the latest iPhone models. Unlike Apple— which focuses on consumer applications—Microsoft, Meta, Alphabet, and Amazon largely direct their AI strategies toward business solutions.

During this earnings season, Alphabet and Amazon effectively communicated the positive impacts of their AI investments on current and future growth. Microsoft and Meta, however, have not articulated these benefits as clearly.

That said, it is unlikely that these well-run companies are squandering resources on unproductive projects. Their commitment toward future technology positions them well for leadership in an AI-focused landscape. Thus, concerns about capital expenditures may be overblown.

Looking at broader trends, total Q3 earnings for the Technology sector are projected to grow by 19.3% year-over-year, along with an 11.4% revenue increase. If it weren’t for Intel’s significant losses in the last quarter, earnings growth for the sector would have soared to 30.5%.

Q3 Earnings Season Highlights

As of November 1st, results from 350 S&P 500 companies—representing 70% of the index—have been reported. Another 104 S&P 500 members are scheduled to release results this week, bringing the total to over 90% of the index.

The combined earnings from these 350 companies have risen by 8.8% from the previous year, with revenues increasing by 5.7%. Notably, 74.9% of reporting companies have surpassed EPS estimates, and 60.6% have exceeded revenue projections.

Among the 350 companies, 50.3% beat both EPS and revenue targets. While growth trends show stability, fewer companies have exceeded expectations compared to more recent periods. In fact, the percentages of exceeding EPS and revenue expectations are currently below the 20-quarter average.

The Broader Earnings Context

Overall, when aggregating results and estimates for upcoming reports, total earnings for the S&P 500 index are anticipated to rise by 6.8% compared to the last year, along with a revenue bump of 5.4%.

The performances of the Energy and Tech sectors are contrasting; while the Energy sector has exerted downward pressure on earnings growth, the Tech sector has bolstered it. Without the setback from the Energy sector, S&P 500 earnings would rise by 9.2%, and without Tech’s influence, growth for the remaining index members would shrink to only 2%.

Excluding the Magnificent 7, Q3 earnings for the remaining 493 S&P 500 companies would show a mere 1.3% growth instead of the projected 6.8%.

Looking ahead to Q4 2024, total S&P 500 earnings are expected to grow by 7.7% year-over-year, alongside a 4.4% increase in revenues. Unlike the significant estimate reductions witnessed prior to the Q3 season, projections for Q4 appear more stable.

Remember, this year’s 7.5% earnings growth is expected to rise to 9.5% when excluding Energy sector impacts.

For an in-depth exploration of the earnings landscape as well as future expectations, please refer to our weekly Earnings Trends report >>>>Tech Flexes Earnings Power: A Closer Look

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