It has been a huge week for big tech earnings. After Microsoft (MSFT) and Alphabet (GOOG, GOOGL) reported on Tuesday, Apple (AAPL), Amazon (AMZN) and Meta (META) all revealed their calendar Q4 2023 results after the close yesterday. All five of them recorded beats of expectations in terms of EPS but, for various reasons, the market reactions to their earnings have been mixed. That makes it difficult for those who want to illustrate a theme of some kind in big tech earnings, but it is actually very healthy for all of these stocks, however the market is reacting now.
On the other hand, it may not be good news for market commentators because it could signal the end of a convenient and catchy label, "The Magnificent Seven."
Let’s not lose sight of the fact that all five of these massive, widely analyzed companies made more money in Q4 than analysts anticipated. That is obviously a good thing. It is, however, not as big of a deal as you might think if you don’t really understand the way these things work. This quarter is actually below average in that "only" around 70% of S&P 500 companies are beating expectations rather than the usual 75% or so.
That such a high percentage of companies beat expectations is kind of ridiculous, but understandable: There seems to be a mutually beneficial, silent agreement between corporations and analysts, whereby CEOs shoot low on their guidance, and analysts accept that as gospel and consistently underestimate earnings as a result. That enables management to underpromise and overdeliver, which is always considered a good idea in business, and avoids analysts being accused of misleading clients by artificially pumping up stocks in which their institutions typically have long positions.
This whole situation has been going on for so long that nobody seems to question it, and I guess it does no harm as long as everyone understands it, but it still seems weird when you stop and think about it.
In any case, beats by big tech firms this quarter have been hard-won and are a little surprising. They have been hard-won because after a year and a half of rate hikes by the Fed and other western central banks, and with the Chinese economy being impacted by a slow developing real estate crisis, this was supposed to be a tough quarter.
And they are surprising because the last three months have been about a market driven by gains in a few big tech stocks, so analysts have been scrambling to revise their estimates for those stocks upwards in order to reflect that market sentiment. If that strikes you as a bit backwards, you are probably right. The market should be led by a rational, dispassionate analysis of a company’s potential profit rather than estimates for that profit being influenced by the views of traders, but history shows that traders usually get these things right, which makes it wise to listen to their collective opinion.
Consistently earning more than upwardly revised estimates suggest indicate that all is well in the world of big tech, political grandstanding, criticism, and regulatory issues notwithstanding. That may irk some people, but they are such a major part of the American economy that, to borrow an old catchphrase, what is good for the likes of Microsoft, Apple and Amazon is good for America, whether you like it or not.
The good news, though, isn’t just about massively wealthy and powerful corporations becoming wealthier and more powerful. It is also about the fact that after three months of lumping all big tech companies together, the differing reactions to these earnings based on differences of outlook suggests that the market is beginning to differentiate and trade based on the actual performance and prospects of each company, rather than on the perception of the group as a whole.
Lumping big tech companies together in named groups began a few years ago when CNBC's Jim Cramer coined the term “FANG” to refer to Facebook, Amazon, Netflix, and Google. That acronym and its constituent parts changed as companies changed names, along with the emergence of AI technology as the dominant force in earnings potential. Eventually we landed on the "Magnificent Seven," which in addition to the five named above, also includes Tesla (TSLA) and Nvidia (NVDA).
As with all shorthand names for groups of stocks, this one will have a limited shelf life. Other than being well-known, connected to tech, and having posted good gains in their stocks over the last year or so, there is not a lot to link them together. This group is comprised of a car manufacturer, two social media companies, a retailer, a consumer goods company, a software company, and a chip maker. Calling them the Magnificent Seven is fun for financial market talking heads, but it is a bit lazy and misleading.
However, it looks like this earnings season will mark the start of a divergence in performance, perhaps signaling the overdue death of the use of the phrase "Magnificent Seven" as investors and traders focus on each company on its own merits, rather than lumping them all together.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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