Last week, the big US banks got earnings season off to a flying start, but for most traders, those are just an appetizer ahead of the main course: The FAAMG (Facebook, Apple, Amazon, Microsoft, and Google/Alphabet) technology behemoths that make up about a quarter of the total value of the S&P 500.
Not surprisingly, expectations are high heading into this quarter’s reports. Whereas the S&P 500 index as a whole is expected to report revenue growth of 14.6% in Q3, all five FAAMG names are expected to exceed that, with growth estimates ranging from Amazon’s 16.5% rate to Alphabet’s 37.5%.
Despite their market dominance and massive profits, the FAAMG stocks will have to navigate the same major themes this earnings season as every other company:
- Inflation and rising interest rates
As primarily software-focused companies, the FAAMG stocks are somewhat insulated from rising commodity costs. That said, the accompanying uptick in global interest rates will be a major factor in determining whether their stocks will be able to maintain their outperformance in the coming months.
Contrary to popular opinion, recent studies have shown that low interest rates may actually be anti-competitive, benefitting the largest companies by allowing them to reduce their borrowing costs and aggressively buy out upstart competitors. From this perspective, rising interest rates could actually reduce these behemoths’ competitive advantages as well as introduce more competition for investors’ marginal dollars. Any mention of this dynamic from these companies’ management could remind traders of these risks.
- Supply chain disruptions
Though they do focus heavily on software, the FAAMG stocks are also electronics manufacturers to varying extents. Between Apple’s iconic products, Facebook’s Oculus division, Google’s Android phones and tablets, Microsoft’s Surface and Xbox, and even Amazon’s tablets, the ongoing global semiconductor shortage will remain front and center for the foreseeable future. Apple recently announced that it expects to sell up to $4B less than it would have without the shortage, and Microsoft also warned that its revenue from Surface tablets and Xbox consoles could be light as well.
With expectations for FAAMG profits running sky high, traders will be anxious to see how each firm is navigating the chip shortage, with warnings on that front potentially leading to a big drop in the associated stock.
- Forward guidance
The final major theme to watch from FAAMG earnings this quarter will be forward guidance. With fiscal stimulus slowing down across the planet and major central banks looking to “normalize” monetary policy as the global economy recovers from the depths of the COVID recession, it will be difficult for most companies to match the stellar growth rates of the last couple quarters. For these primarily digital companies, there are additional risks from people getting vaccinated and prioritizing “real world” experiences again rather than being cooped up at home with electronic devices as the only way to communicate with the broader world.
Recent comments from tech executives suggest that they believe the recent online-first habits picked up during the pandemic will remain “sticky” even in a post-pandemic world, but traders will certainly be paying attention to see if, and when, that trend may reverse.
Stay tuned for our article tomorrow highlighting the key dates, earnings expectations, and technical levels to watch on each of these individual stocks to ensure you're as prepared as possible for the high point of this quarter's earnings season.
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