Will Big-Tech Drive Indices to Record Highs in Q2?

The last year has been a volatile one for investors to say the least. Several indices fell off a cliff in March 2020 as the COVID-19 pandemic resulted in economic shutdowns, rising unemployment rates, and lower consumer spending. Several sectors including retail, energy, hospitality, airline, and restaurants were decimated.

However, the pandemic also acted as a tailwind for companies in the technology sector as the demand for e-commerce, cloud computing, social media, and gaming soared. Trillion-dollar giant stocks including Apple Inc AAPL, Microsoft Corporation MSFT, Amazon.com, Inc AMZN, and Alphabet Inc. GOOGL gained solid momentum in 2020 and pushed the S&P 500 to record highs.

While the markets continue to remain volatile in 2021 due to concerns surrounding valuation, multiple COVID-19 strains, and rising interest rates, investors are also buoyed about the fast rollout of vaccinations at least in the U.S.

The upcoming earnings seasons remain critical for investors. The Q1 results and specifically earnings of companies part of the high-growth tech space are expected to drive markets in 2021. After four consecutive quarters of earnings decline, the S&P 500 is forecast to report year over year earnings growth of 24.5% in the March quarter according to a FactSet report. Let’s take a look at what this earnings season has in store for big-tech companies.

Apple
Apple accounts for 6% of the S&P 500 and is currently valued at a market cap of $2.23 trillion. The consumer technology giant is a market leader in several verticals and has successfully created an eco-system that ensures customer loyalty and repeat purchases.

It now has multiple subscription businesses that include the Apple TV+, Apple. Arcade, Apple Care, and Apple Music. It is one of the largest smartphone manufacturers and leads the high-growth wearable segment as well.

Apple Services is the company’s second-largest business segment which suggests Apple is no longer dependent on hardware sales to drive top-line growth.

In the March quarter, Wall Street expects Apple to report sales of $77 billion, indicating year-over-year growth of 32%. Comparatively, its earnings are forecast to rise by 53% to $0.98 in Q1.

Microsoft
The second-largest holding of the S&P 500, Microsoft accounts for 5.44% of the index. In the last decade, Microsoft has successfully transformed itself from a software company to one of the largest players in the cloud computing space.

Microsoft Azure is in fact the second-largest public cloud platform in the world after Amazon Web Services. The company’s commercial cloud sales that include Office 365, Azure, Dynamics 365, and others accounted for close to 40% of total sales and grew by a robust 34% year over year in the last quarter. These subscription-based products will allow Microsoft to generate steady cash flows across business cycles.

In the March quarter, analysts expect the company to post revenue of $41 billion which is 17.3% higher than its prior-year period. Comparatively, earnings are forecast to rise by 26.4% as well to $1.77.

Amazon
While Amazon is synonymous with e-commerce, it is also the largest public cloud player in the world. Further, it's the third-largest digital advertising company after Alphabet’s Google and Facebook. According to a report from eMarketer, Amazon’s market share in the digital ad space stands at 10.3%.

Valued at a market cap of $1.7 trillion, Amazon accounts for 4.08% of the S&P 500. In Q4, the company’s e-commerce sales were up 40% year over year and this figure stood at 28% for 2020. International sales soared 57% indicating Amazon is gaining traction in other e-commerce markets too.

The company’s e-commerce revenue accounts for approximately 33% of online retail sales in the U.S. While the online retail business is Amazon’s cash cow, its cloud segment is raking in the profits. In Q4, cloud computing revenue soared 27% reporting over $3.5 billion in operating profit.

In the March quarter, analysts expect Amazon to post revenue of $104.4 billion which is 38.4% higher than its prior-year period. Comparatively, earnings are forecast to rise by 89% as well to $9.47.

Alphabet
The fourth-largest holding in the S&P 500 is Alphabet that accounts for 3.71% of the index. Alphabet is the parent company of Google which is the largest search engine in the world. In the June quarter of 2020, Alphabet’s revenue declined year over year for the first time ever as enterprise ad-spending was cut significantly due to the pandemic-driven recession. However, in the December quarter, ad sales roared back to life and were up 22% year over year.

Google’s Cloud business grew by a stellar 47% in Q4 and is steadily gaining market share from leaders Amazon and Microsoft. In fact, Google Cloud sales have risen from $5.83 billion in 2018 to $13.06 billion in 2020. The public cloud market is valued at $236 billion giving Alphabet enough opportunities to grow its top-line in 2021 and beyond.

Wall Street expects Alphabet to increase sales by 24.7% to $51.3 billion in Q1 while earnings are forecast to grow by 60% to $15.8.

Facebook
Facebook accounts for less than 2% of the S&P 500 and is the index’s fifth-largest holding. It is the largest social media company in the world and it drew 3.3 billion people to its platforms if you include WhatsApp and Instagram. That’s over 40% of the total world population.
This allowed Facebook to increase ad-sales by 21% year over year in 2020. Right now, it is yet to monetize messaging platforms such as Messenger and WhatsApp, making it one of the top stocks in the world.

In Q1, analysts expect Facebook sales to rise by 32.6% to $23.5 billion while earnings are forecast to grow by 38% to $2.36.

The final takeaway
The five tech behemoths mentioned above account for almost 20% of the S&P 500. While these companies have experienced an impressive rally despite the pandemic, the upcoming quarterly results and management guidance will decide the course of equity markets in 2021.