Big Tech earnings are poised to determine market direction

Just five companies control nearly a quarter of the S&P 500 index’s market capitalization, and they will all report earnings this week that could determine the direction of the market for weeks or months to come.

As Big Tech — Google parent Alphabet Inc. GOOGL
Apple Inc. AAPL,
Parent company of Facebook Meta Platforms Inc. META
and Microsoft Corp. MSFT
— is preparing to report, there are serious doubts about their near future for the first time. All five have either signaled that they are cutting costs or plan to do so soon, as MarketWatch’s Jon Swartz reported.

Amazon ripped the band-aid off three months ago, and it looks like some of its Big Tech cohorts could do the same this earnings season. Apple is reportedly planning cost cuts for next year, while Microsoft is closing open positions and making small layoffs. Meta Chief Executive Mark Zuckerberg told employees on the last day of the second quarter that they were facing one of the “worst downturns we’ve seen in recent history,” and Alphabet CEO, Sundar Pichai warned employees to slow down hiring just days after the close shift. Results last week from Snap Inc. SNAP
and Twitter Inc. TWTR
show that concerns about the digital advertising industry are well founded.

Meta Earnings Preview: Facebook Enters a Storm of Uncertainty and the Wrong Kind of “Firsts” Appear

Even an early profit warning from Microsoft and the knowledge that Amazon is already cutting costs may not be enough to fully prepare Wall Street for what may come. One area that could cause a major ripple is a slowdown in the growth of cloud computing, as noted by Therese Poletti, an analyst telling her “people are going to freak out.”

Any significant change for these five companies would have major knock-on effects in the market. Collectively worth about $7.5 trillion despite declines that have already hit this year, the five companies represent about 23% of the total market capitalization of the S&P 500 SPX Index.,
according to the Dow Jones Market Data Group.

The group’s earnings and revenues have rattled the broader market in recent years as the COVID-19 pandemic weighed on their balance sheets. Collectively, the quintet generated profits exceeding $320 billion last year, with sales topping $1.4 trillion, which would rank 13th in gross domestic product as a nation, just behind Brazil and ahead of Australia, according to World Bank figures.

This year is going to be a tough comparison with that performance, especially after Amazon reported a loss of nearly $4 billion in the first quarter. And reducing the costs of these companies will have an effect on the wider technology economy. The real concern in Silicon Valley and on Wall Street is that a domino effect is happening – Big Tech is cutting costs, hurting the smaller tech companies that depend on them, which in turn are incurring or at least reducing costs such as cloud computing, cloud software, hardware and more, causing more pain across the industry.

Take, for example, Kornit Digital Ltd. KRNT,
which warned Wall Street earlier this month that it would miss revenue projections by more than 30%, with executives explaining that “some of our customers are working with excess capacity built up throughout the pandemic period of two year”. Kornit’s biggest customer for its on-demand garment printing services and machines: Amazon, which accounts for more than a quarter of the company’s revenue. Although the company did not detail planned cost reductions in this announcement, executives may detail those plans when releasing full results in August.

Any hint of widespread cost reductions to come will be included in the forecast instead of the actual numbers, and the forecast has been scary so far: of the 11 S&P 500 companies that have offered earnings forecasts so far this season 10 were below expectations, FactSet Senior Earnings Analyst John Butters reported Friday. Apple hasn’t been guiding during the pandemic, and Google executives aren’t providing any type of financial forecast, so look for color on what’s in store for these companies instead.

Alphabet revenue overview: Google may be the safest of digital advertising giants, but that’s not saying much right now

Alphabet will report Tuesday afternoon, followed by Google and Microsoft on Wednesday and Apple and Amazon on Thursday. They will be the headliners for the busiest earnings week yet, although many more are joining them.

This week in gains

About 35% of the S&P 500, 175 companies, are expected to report in the coming week, and 40% of the 30 Dow Jones Industrial Average DJIA
components are on file. In addition to Apple and Microsoft, Dow component reports include Coca-Cola Co. KO,
3M Co. MMM,
McDonald’s Corp. MCD
and Visa Inc.V
tuesday; Boeing Co.BA
Wednesday; Honeywell Inc HON International Airport,
Intel Corp. INTC
and Merck & Co. Inc. MRK
Thursday; and Chevron Corp. CLC
and Procter & Gamble Co. PG
to end the week on Friday.

In addition to Big Tech, here are a few other reports and numbers that will be important to the market.

Numbers to watch

Profits of oil companies: The fate of corporate profit margins, which hit an all-time high more than a point higher than before in 2021, rests with Big Oil. With Russian oil largely cut during the invasion of Ukraine, US oil giants are receiving windfall profits, which will be explained in detail Friday morning when Exxon Corp. XOM
and Chevron both report. Exxon has already disclosed about $2.5 billion in additional earnings for the quarter, while analysts expect Chevron’s total quarterly profit to be $10 billion. And expectations are only rising – Butters noted on Friday that earnings expectations in the energy sector have risen from 219.8% growth to 265.3% since the start of the earnings season, while revenue growth expectations fell from 44.7% to 55.9%.

Full earnings preview: Intel needs a big second half to hit its guidance, but the end of the PC boom makes success unlikely

Intel margins: Intel chief executive Pat Gelsinger has decided to sacrifice the chipmaker’s margins somewhat as it tries to implement a more robust manufacturing regime, but how much it’s willing to slash is the big question to ask. Wall Street. In addition to the financial results, Intel could celebrate a big win in Washington DC this week as Congress tries to close funding for U.S. chipmaking that Intel and Gelsinger have sought in recent months.

Calls to put on your agenda

Visa and MasterCard: Amid legitimate fears of a recession, American Express Co. AXP
reassured some analysts on consumer spending on Friday, with Chief Financial Officer Jeff Campbell telling MarketWatch that customers were showing “no signs of stress from a credit perspective.” However, AmEx customers tend to have higher incomes, so when Visa reports Tuesday afternoon and Mastercard Inc. MA
Thursday morning, their leaders are expected to paint a more complete picture of consumer spending in the second quarter.

Shopify: E-commerce has seen a decline in the third year of the COVID-19 pandemic, and while Amazon is the king of e-commerce, Shopify Inc.
has its hands in a lot more pies like the backbone of most endeavors outside of Amazon’s gargantuan marketplace. Since detailing the drop in first quarter earnings, Shopify jumped on the stock split bandwagon to keep control of its founder, so now that founder, CEO Tobi Lütke, will be wanted to appease investors. which sent shares down 73.4. % so far this year.

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