- Four Big Tech names — worth nearly $5 trillion — all report earnings Thursday, and that could create "crazy" market volatility if one or more disappoint.
- Apple, Amazon, Alphabet and Facebook are all scheduled to report in the 4 p.m. hour Thursday, and they along with Microsoft have led much of the market's gains.
- "Whether they reported in four days or one, we're getting the same news flow. What it does represent is a large amount of volatility when the numbers come out," said one analyst.
Big tech could be about to make a big splash.
Four of the market's five biggest stocks report earnings within a single hour on Thursday afternoon and that could cause big volatility in after-hours trading and again on Friday.
"Friday is going to be crazy," said Dan Niles, founder of AlphaOne Capital Partners. "If anybody misses their numbers, that's not going to be good."
The outperformance of these companies against the broader market has already raised concerns that too much of the market's momentum is concentrated in too few names. And the reports coming all at once will be a lot for investors to digest.
"Ultimately, these companies were going to report anyway," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. "Whether they reported in four days or one, we're getting the same news flow. What it does represent is a large amount of volatility when the numbers come out."
A slew of other companies report earnings on Thursday as well, starting with Procter & Gamble, Comcast, Eli Lily and Ford early in the day. But the Big Tech names are the most anticipated because of their sheer size as part of an elite group of companies with a market cap of more than $1 trillion.
They have collectively had the biggest impact on the market, and it's their momentum that could determine whether Nasdaq continues to hit new highs.
In addition to financial results, the companies could provide a first look at how their businesses have been impacted in the last couple of weeks, as more states shut down some activities due to the spread of the coronavirus.
"If they make some comments that advertising spending is starting to slow in the last couple of weeks, how are people going to take it?" Niles said. "With stocks up this much and so many people owning stocks in the retail market, they might not be as informed on what they own. That could create some really wild action."
Niles said that with stocks heading higher into earnings, the action could be even more exaggerated if something goes wrong. But the big four could also add volatility on the upside.
The Big Tech companies typically report within days of each other, but this quarter they ended up altogether. Facebook would have reported Wednesday, but it changed the date to Thursday. Facebook CEO Mark Zuckerberg and the CEOs of the other three big tech companies all testified before Congress Wednesday.
Golub notes that the four tech stocks, along with Microsoft, have returned 49% over the past 12 months, compared to the rest of companies in the S&P 500 that have "barely budged" during the same time frame.
He said about three-quarters of the outperformance of all five stocks, including Microsoft, has been the result of earnings growth. Net margins, at 17.3% on average, are 70% higher than for the rest of the S&P 500 names in the trailing 12 months.
Profits for the five stocks were up 3.1% in the same period, versus a 9.2% decline for the S&P 500 companies. Golub said they have strong cash positions, and their higher margins give them better results in periods of market stress.
The four stocks reporting Thursday represent about 16% of the S&P 500, based on Tuesday's close, and their collective market cap was $4.87 trillion. The stocks have surged ahead this year, helping pull the Nasdaq to new highs.
For instance, Amazon is up 63% so far in 2020, while Apple is up 29% year-to-date. Alphabet and Facebook are up about 13% each, while the S&P 500 is just about a half percentage point higher for the year. Apple has the largest market cap at $1.65 trillion, as of Wednesday's market close. Amazon was at $1.51 trillion, and Alphabet was valued at $1.04 trillion.Facebook was $665 million.
When it comes to Nasdaq, the four stocks have even more clout. They are about 34.5% of the Nasdaq 100.
"If you have almost 20% of the market in four names that have been doing really well, and those four collectively miss by a chunk, we cannot afford to have the market question whether we can have these names continue," said Golub. "The fundamental story is so strong on these. I think they're perfectly fine. I don't think there's an issue."
While the impact of the coronavirus has slammed earnings across the broader market, tech is not expected to see as big a dent. The four stocks saw some benefit during the virus shutdown, as some of their business benefits from consumers staying home and working from home.
According to Refinitiv I/B/E/S estimates, tech earnings are coming in about 3.6% lower this quarter, while the S&P is seeing profits down 39%. Investors tend to lump the stocks together as Big Tech, Amazon in reality is part of the S&P consumer discretionary sector, and Google and Facebook are in the communications sector.
Companies are beating at a solid pace, near 80%, which is much higher than the 65% typical beat rate. Tech is beating by an even bigger margin- with 96% beating estimates.
Golub said the average size of the earnings beat is about 13% above estimates, compared to a usual pace of 3% to 4%.
"More companies are beating, and the level of the beats when they get them are huge," Golub said. "What's odd is the companies that are missing are not getting that beaten up anyway. From that perspective, if the trend continues these four companies are going to do really well. Unless they have an ugly quarter, the downside risk for them is smaller than normal anyway."
Ari Wald, technology strategist at Oppenheimer, said it's not the over-concentration of gains in the tech names that he's worried about.
"The real question is, I point the finger at the other areas of the market. Why haven't they been able to produce gains? They've fallen so much in terms of the composition of the market. That is the bigger issue plaguing the market," said Wald. "Tech is strong. The rate of change is nowhere near where it was in the 1990s. The relative outperformance — and that's what's been extended — is really created by weakness everywhere else in the market. What it really caused is a bubble in dispersion."