Wall Street is betting that the most popular U.S. technology and internet stocks can keep outshining the broader equities market, but their latest rally leaves little room for error this earnings season.
Investors dashed for the exits after last Tuesday’s less-than-stellar quarterly report from Netflix - the N in FAANG - an acronym for the group of U.S. tech companies that have been the biggest drivers of the bull market.
Hopes remained high for the other FAANGs - Facebook, Apple, Amazon and Google parent Alphabet , as well as Microsoft, ahead of their financial reports.
Daniel Morgan, portfolio manager at Synovus Trust in Atlanta describes the group as the “Cadillacs” of the technology sector, and said they should keep providing an outsized boost to the S&P 500.
“They’re still going to be the show-business highlight stocks that everybody focuses on, and I expect them to do well,” said Mr. Morgan, a long-time technology stock investor.
Analysts also see the group reporting faster revenue growth than the broader S&P 500 for the December quarter and faster earnings growth in some cases.
However, with recent gains among most of the group far outstripping the broader market, general equity strategists say the market’s superstars may need to provide outsize positive surprises in their quarterly numbers and their forecasts for future growth.
In comparison to the S&P 500’s gain of roughly 12 per cent from the start of October to Thursday’s close, Apple rose about 43 per cent, while Facebook climbed about 24 per cent and Google jumped almost 22 per cent, just beating Microsoft’s 20-per-cent advance.
“We do believe there could be downside for the stocks if they do not overdeliver on earnings and narrative,” said John Augustine, chief investment officer at Huntington National Bank in Columbus, Ohio. “To push the stocks higher from here, both earnings and guidance need to beat expectations.”
The S&P 500’s fourth-quarter earnings are expected to decline 0.8 per cent and revenue is seen rising 4.4 per cent, according to the latest estimates gathered by Refinitiv.
In comparison, Apple earnings for its fiscal first quarter ended in December are seen rising 8.7 per cent, while revenue could climb 4.8 per cent year-on-year when it releases results on Jan. 28.
In comparison, Facebook, due to release fourth-quarter numbers on Jan. 29, is expected to report earnings growth of 6.2 per cent on revenue that is estimated to grow 23.4 per cent year-on-year. On the same day, Microsoft is expected to post an earnings gain of 20 per cent on revenue that is seen rising 9.9 per cent for its fiscal second quarter ended in December.
On Jan. 30, Amazon is expected to report a revenue rise of 18.7 per cent in the same timeframe, although earnings for each share are seen declining more than 30 per cent, because it announced it would beef up investment in its package-delivery business during the fourth quarter.
The last of the group due to report, Google’s parent Alphabet, is expected to announce a decline of 1.7 per cent for fourth-quarter earnings and a revenue increase of 19.5 per cent in its Feb. 3 release.
Of all the group, Mr. Morgan, at Synovus, favours Amazon most as he expects strong growth and profit margins in its cloud computing business. Plus, the stock has underperformed its peers, and the S&P 500, with a 8.6 per cent gain since early October.
Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh favours Microsoft because of its “great suite of products with no true replacement” but also cites a solid outlook for Facebook, Apple, Amazon and Alphabet.
They’re “core holdings for so many managers that they would have to have serious issues for them to be sold. Plus, when people buy an index, they are buying a lot of these companies given the market weight cap of an index,” Ms. Forrest said.
But she added: “They need to have a good enough quarter and forecast a better 2020 and be able to list the reasons why it’ll be better than 2019.”
Ken Mahoney, chief executive of Mahoney Asset Management in Chestnut Ridge, New York, said Netflix faces tough new competition from companies including Apple and Walt Disney Co but the rest of the group have “wide moats,” including consistent growth and strong balance sheets. But he is not buying more of the group, arguing that valuations are too high.
“I’d look to add on some of these names in a pullback,” Mr. Mahoney said.
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