Nasdaq 100 Set for Significant Breakthrough

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In the coming week, the financial reports from major tech giants are set to unveil their most recent performancesAnalysts anticipate that these companies will not only achieve growth in their earnings but could also surpass overall market trends, potentially providing solid support for various indicesThe tech sector stands at a crucial junction, where the interplay between economic conditions, consumer demand, and corporate strategy will dictate the pace and direction of this growth.

Since the last earnings season, the valuations of these prominent tech companies have retreated, with most experiencing declines greater than the Nasdaq-100 indexMicrosoft, capitalizing on its diversified business model and early lead in artificial intelligence (AI), has maintained a valuation premium compared to competitors

Alphabet has rebounded quicker than its social media peers in advertising prices on its search and YouTube platformsMeanwhile, Meta has grown its user base but is increasingly pressed for profits through new channels and productsAmazon has seen a notable improvement across its e-commerce and cloud computing sectorsHowever, as market sentiment has turned cautious concerning Apple, success hinges on the new iPhone 15, the recovery of hardware demand, and the ongoing expansion of services.

Upcoming Earnings Reports from Major Tech Firms
Expectations are High for Outperformance

Some of the largest publicly traded companies in the world are on the brink of releasing their earnings reports.

Below is a summary of general Wall Street profit predictions for major tech companies, as compiled from Bloomberg statistics:

According to FactSet data, this earnings season marks the first time in a year that S&P 500 companies are expected to achieve profit growth

Preliminary results have so far indicated modest gains, yet the majority of earnings have yet to be disclosedFactSet estimates that profit growth for S&P 500 firms this quarter could range between 1.3% and 7.0%, which generally exceeds expectationsThis span is based on last year's average performance and the peaks of the past decade.

Considering these factors, it's not surprising that large tech stocks are poised to outpace the market once again this earnings season, driven by efforts to cut costs, resilience in growth, and new possibilities in AIHowever, it is noteworthy that while all major tech stocks have risen more than the S&P 500, some have underperformed the tech-heavy Nasdaq-100 indexThis creates a scenario where large tech companies could potentially outpace the market this season, aiding in stabilizing indices, yet the uncertain economic outlook looms as a threat to future performance.

Let’s take a closer look at market expectations for the five tech giants this earnings season.

Microsoft's Profit Growth Expected at Record Highs

Azure, Cloud Computing, and AI are Key Drivers

Despite a recent pullback, Microsoft has retained its market lead over other large competitors due to confidence in its diversified business strategy, combining software, hardware, and cloud services

This synergy appears resilient even in challenging environments where growth targets are pursued.

However, the demand for consumer electronics remains lackluster, with the More Personal Computing segment—encompassing sales of computers and Xbox consoles—expected to see a further decline of 3.3% this quarter.

On the flip side, Microsoft's diversified activities are bearing fruit, as the demand for its software suite, including Office and the social media platform LinkedIn, continues to be robustThis demand is compensating for the aforementioned losses, with revenue growth projected to accelerate, possibly exceeding 11% this quarter.

In addition, the intelligent cloud sector has experienced a slowdown compared to last year, but still maintains a double-digit growth trajectory

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Wall Street forecasts a 16% revenue increase this quarter, with Azure's acceleration forefront in focusAnalysts expect Azure's revenue to grow by 27%, driven by Microsoft's vigorous advancement of its AI capabilities, leveraging its partnership with OpenAI to power systems like ChatGPT.

This combination of robust growth with higher profit margins is set to push Microsoft's profit growth to new highs this quarterHowever, investors are wary that the increase in generative AI investments may pressure profit margins in upcoming quartersIf Microsoft can effectively navigate heightened competition at lower costs, it may surprise the market positively.

Advertising Market Weak, But Alphabet's Strength Persists

Google Cloud Remains Critical

Alphabet's revenue is projected to continue accelerating for the third consecutive quarter, with an expected increase of 9.2% to $75.46 billion

Despite a sluggish advertising market, Alphabet's dominance in search has allowed it to achieve growth, with YouTube returning to growth following pressure over the past year.

Google Cloud is anticipated to contribute heavily, with estimates predicting a 25% revenue growth this quarter, positioning it to compete favorably against rivals Amazon and Microsoft while also achieving a third consecutive quarter of operating profit growth.

Alphabet’s quarterly profit growth is expected to outpace revenue growth due to improved Google Cloud profitability and a rebound in advertising prices, which are recovering faster compared to social media counterparts.

Market sentiment towards Alphabet’s AI prospects is gradually warming, with diminishing fears regarding competitive threats

Yet, many investors remain skeptical about its ability to stay ahead, particularly in light of challenges from OpenAI's ChatGPTHowever, Google Cloud's rapid progress, driven by AI, has exceeded expectations.

Recent promotional activities reflect Alphabet's dedication to rejuvenating its smartphone market prospects through the introduction of new AI tools for its Pixel lineWhile other tech giants may closely observe its dominance in the search space, Alphabet remains poised to confront challenges from competitors.

Improving Ad Revenues Enhance Market Perception of Meta

Attention on Reality Labs

Meta has recently launched a suite of new products, from the Quest 3 headset and augmented reality Ray-Ban glasses to AI-driven chatbots and tools powered by the Llama language model, sparking excitement in the market.

While Meta expresses a readiness to pivot towards new technologies, the disappointing and costly efforts in the metaverse and a lackluster performance from Threads highlight challenges in certain areas where it must intensify efforts for success.

The market will keenly watch the performance of Reality Labs, which is separate from its social media operations, yet continues to incur significant losses

Analysts predict that Reality Labs will post a $3.9 billion loss this quarter.

Fortunately, Meta is achieving faster profit growth in its core social media applications, alongside ongoing cost-cutting measures, including nearly 20% workforce reductions over the past yearThis alleviates some pressure on monetizing new ventures as investments continue to rise.

With advertising revenues recovering, this context improves market sentiment, driven by a shift towards ReelsAlthough pricing remains weak, attracting more market fund remains a possibilityAd prices are expected to decline approximately 5.8% from last year, yet this marks a notable improvement over recent quarters

Any performance exceeding expectations will bolster confidence that the ad market has hit its trough and present a chance for Meta's robust rebound in 2024 given a favorable economic environment.

AWS and E-commerce Expected to Reverse Slowdown

Amazon's Profits Expected to Surge

Amazon is poised to achieve comprehensive growth this earnings season, with signs indicating a positive trend.

The bulk of profits stem from its AWS division, which is projected to maintain a 12.7% revenue growth from the previous quarter, suggesting signs of stabilization following a downturn lasting 18 months

The increasing demand for AI may contribute to a resurgence in growth in coming quarters.

E-commerce is also recovering, driven by strong double-digit growth from third-party salesThe successful Prime Day earlier this month may significantly impact forecasts for fourth-quarter e-commerce, with the expectation of a return to accelerated salesAdditionally, its subscription service has shown a recent uptick, indicating that consumers still value offerings like Prime.

In a fragile economic environment, the advertising segment should remain strong, with revenue growth projected at 21%. This surpasses that of more formidable competitors, signifying Amazon's growing foothold in areas traditionally dominated by Meta and Google, although it still has a considerable journey ahead to catch up.

Projected profit increases are primarily due to a weak comparative base from last year in conjunction with margin increases, as cost growth is currently lagging behind revenue growth.

Investor Concerns About Apple's Business Outlook Remain

Performance in the Chinese Market is Highly Anticipated

Last quarter, despite outperforming market expectations, Apple’s stock fell by 7% amidst concerns regarding its business outlook

Apple warned that its revenue for the last three months of the fiscal year would decline for the fourth straight quarter, forecasting a 1% drop to approximately $89.27 billionThe iPhone, as its primary revenue stream, is expected to grow by 2.3%, while service sector growth persists; however, demand for the iPad, Mac, and wearable devices appears sluggish.

Given that the iPhone 15 was only released in September, the financial figures for this quarter primarily reflect initial post-launch salesWhile growth in iPhone sales could bolster confidence in its popularity, the true test will come during the upcoming holiday shopping season.

The Chinese market’s performance is highly anticipated

External pressures may lead consumers towards purchasing Chinese brands like HuaweiA report from Counterpoint Research indicates that the iPhone 15 saw a 4.5% year-on-year decline in sales during its first 17 days in China, significantly influencing market sentimentMeanwhile, Jefferies noted that declines in iPhone sales could be sharper due to the impressive performance of the Huawei Mate 60 Pro.

Although Apple has not provided formal financial forecasts for several years, investors are still keenly focused on its outlook for the new fiscal yearAnalysts expect that with a rebound in sales for the iPhone 15 along with the Mac and wearable devices, first-quarter revenues next year are likely to return to growthCurrently, the smartphone and electronics markets appear to be stabilizing, as consumers may consider upgrading the technology products purchased during the pandemic

However, persistent economic uncertainties and potential slowing consumer spending pose risks, leading to a cautious market outlook.

Significant Divergence in Valuations Among Major Tech Stocks

Meta, Alphabet, Apple Valuations Below Market Average

As the earnings season approaches, a marked divergence in valuations among major tech stocks has become evidentHere are projections for core tech companies’ price-to-earnings ratios based on forward expectations for the next 12 months:

Recently, advertising titans Meta and Alphabet have performed robustly relative to other tech stocks, both reaching one-year highs

This is largely attributable to their leading positions in the advertising marketDespite the overall market trend showing signs of weakness, both companies have managed to achieve growthAnalysts widely suggest that the most difficult phase for these companies may be behind them.

Last earnings season, Apple’s stock was trading at a premiumHowever, due to concerns regarding economic growth projections, its valuation has fallen below that of the Nasdaq-100 indexConversely, Microsoft has maintained its stock premium, supported by its diversified business lines and investments in AI technology.

Amazon, although exhibiting higher valuations, enjoys optimistic growth prospects rather than its current profitability state

Given the company's scale, its trading price is approximately 2.3 times its annual sales.

Nasdaq-100 Index Approaches Earnings Season Peak

Expect Notable Trend Breakthroughs

The five tech giants collectively represent over 36% of the Nasdaq-100 indexGiven their substantial weight and dominance, their performance this earnings season is poised to have a significant impact on overall market movements.

Currently, the Nasdaq-100 index is fluctuating within a contraction wedge, which suggests that a notable trend breakout may occur as earnings season peak approaches

Despite recent trends oscillating between the 20-day and 100-day moving averages, a clear direction remains elusive.

Consequently, two major prevailing trend lines continue to dominateThe primary downward trend line, drawn from the peak in July, has faced testing four times but remains unbrokenShould it exceed the 100-day moving average, market attention will focus on whether it can break past the 15,300 point threshold.

Since the index's low in late 2022, the upward support trend line has functioned effectively for an extended periodThough it did not play a significant role for most of this year, it has begun to reassert itself over the last three weeks

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