Memo to bears waiting around for the earnings engine to stall for megacap tech firms: keep waiting.
The biggest spectacle in equity markets of late has been giant rallies in computer and internet companies. Apple Inc. is up 79% in eight months, Microsoft Corp. is up 42%, the S&P 500 Information Technology Index rallied 35% and the Nasdaq 100 got $2.4 trillion larger.
Which is to say, a lot was expected this week when Apple, Microsoft and Amazon.com Inc. released results. Given that all three surged to records on sales or earnings that blew past forecasts, it’s safe to say it was delivered.
“The fear was that these stocks were moving too far, too fast, that we would see weakness, and it will be the catalyst for a sell-off,” said Quincy Krosby, chief market strategist for Prudential Financial Inc. “That didn’t happen.”
While coronavirus headlines kept the broader market in check, including a 603-point rout in the Dow Jones Industrial Average Friday, investors who had driven FANG bloc market values to sizes that make them minor economies unto themselves got to say: “we were right.” At least for now.
Given their ubiquity, the performance can be read as affirmation of the health of the U.S. macro backdrop, or at least its corporate side, whose influence shows no sign of diminishing. A considerable portion of America’s economic bounty continues to flow through four or five tech ultra-caps, and owning them over the last six years would generally have allowed you to quadruple your money.
A 48-hour earnings sprint that started on Tuesday muted the skeptics. Amazon, the Seattle-based retail giant, said Thursday that its fourth-quarter sales were $87.4 billion and profit was $6.47 a share, both higher than expectations. Its stock hit a record.
Apple’s $22.2 billion in holiday-quarter profit turned out to be lavish enough to justify its $1.4 trillion valuation and shares that have risen in 11 of the last 13 months. Its stock hit a record.
Microsoft reported $11.7 billion in GAAP earnings for the period ended in December and analysts fell over themselves to lift price targets. Shares have risen eight straight months and gained an additional 2.8% a day after its results. Guess what, its stock hit a record.
To get a sense of the sheer size of the numbers in play, consider a price-earnings ratio using market capitalization and net income in dollars. Apple’s overall value is $1.41 trillion. Using standard accounting, the iPhone maker earned $57.5 billion over the last four quarters, good for a profit multiple of around 24. That’s high, but about even with the S&P 500 on a GAAP basis. For Microsoft, it’s around 30. Amazon stands out as expensive with a P/E of 80, though it trades cheaper than the Nasdaq relative to sales.
All told, Apple’s earnings in the four quarters through December jumped 26% from the same period three years ago. For Microsoft, profits more than doubled over that stretch. This boded well for the broader S&P 500 Information Technology Index, where Apple and Microsoft combined make up 40% of the gauge. Amazon, which isn’t part of the tech index, has seen a five-fold increase in its profits in the past three calendar years.
Technology stocks have been supporting the broader market since at least 2016. And it’s reassuring that after three quarters of earnings contraction the index is set to resume growth. The S&P 500 Information Technology Index is expected to post a 5.4% profit expansion in the fourth quarter, compared with no earnings growth in the broader index, data compiled by Bloomberg Intelligence show. That would be the first time since the second quarter of 2018 that earnings growth in tech stocks eclipses that of the S&P 500.
“Are investors concerned about valuations? Yes, but investors are desperately seeking growth, and this is where they find it,” said Ed Yardeni, chief investment strategist at Yardeni Research Inc. “One of the consequences of a low rate environment is that everyone who’s saving for future needs is under huge pressure. That’s where this excitement about tech megacaps is coming from.”