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Is Big Tech Growth Really Decelerating?

The market’s Amazon AMZN disappointment follows somewhat similar attitudes towards results from Apple AAPL and Microsoft MSFT.

Not to make light of Amazon’s top-line ‘miss’ and weak guidance, but the stock wasn’t exactly flying high before the post-release selloff. Apple shares have been following essentially the Amazon trend this year as well, though Microsoft has been a standout performer. In fact, of the ‘Big 5’ Tech players – Apple, Amazon, Alphabet GOOGL, Facebook FB & Microsoft – the market appreciated only Alphabet’s Q2 numbers that followed similar love for the search giant’s numbers last quarter.

Looking at this elite group of five ‘Big Tech’ players as a whole, these companies earned $74.9 billion in earnings in the June quarter on $320.7 billion in revenues. This group’s Q2 earnings and revenues are up +88% and +35.4% from the year-earlier period, respectively.

Take a look at the chart below that shows current consensus expectations for this group for the coming periods in the context of what they were able to achieve in 2021 Q2 and the preceding period.

Image Source: Zacks Investment Research

If the question is whether the ‘doubling’ of the group’s profitability as we saw in 2021 Q1 is now firmly behind us, then the answer is ‘yes.’ You can see that in current consensus expectations for the next four quarters in the above chart.

Even if we account for some upward revisions to these estimates over the coming days, there is no doubt that the perfect alignment of stars last year for these companies was a unique opportunity. In other words, we will see growth decelerate for these Tech players over the next few quarters, simply as a result of unusually tough comparisons and the ‘law of large numbers.’

This a very short-term view of this group as all of these companies are still capable of generating impressive growth by most conventional standards in the long run. You can see this long-term growth trajectory in the chart below that shows the group’s earnings and revenue growth on an annual basis.

Image Source: Zacks Investment Research

Look at the highlighted part of the chart and note the growth trend from 2022 to 2023. In other words, whether the growth trend for these companies is decelerating or not is a function of your holding horizon.

These companies are impressive growth engines in the long run. Beyond the big 5 Tech players, total Q2 earnings for the Technology sector as a whole are expected to be up +58.4% from the same period last year on +24.1% higher revenues.

The chart below shows the sector’s Q2 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods. Please note that the Q2 earnings and revenue growth rates are the ‘blended’ growth rates, meaning that combines the actual results that have come out already with estimates for the still-to-come companies.

Image Source: Zacks Investment Research

This big picture view of the ‘Big 5’ players, as well as the sector as a whole, shows a decelerating growth trend.

That said, unlike this ‘quarterly view,’ the annual picture shows a lot more stability, as the chart below shows.

Image Source: Zacks Investment Research

Q2 Earnings Season Scorecard

We now have Q2 results from 296 S&P 500 members or 59.3% of the index’s total membership. With another 149 index members on deck to report Q2 results this week, we will have seen results from more than 89% of the index’s total membership by the end of this week.

Total earnings (or aggregate net income) for these 296 companies are up +102% from the same period last year on +26.8% higher revenues, with 89.2% beating EPS estimates and a record 87.5% beating revenue estimates.

The two sets of comparison charts below put the Q2 results from these 296 index members in a historical context, which should give us a sense how the Q2 earnings season is tracking at this stage relative to other recent periods.

The first set of comparison charts compare the earnings and revenue growth rates for these 296 index members.

Image Source: Zacks Investment Research

The growth comparison is likely not fair, given the easy comparisons to the year-earlier period that represented the pandemic’s severest impact on corporate profitability. But it is nevertheless useful to compare the proportion of these companies beating EPS and revenue estimates, as the charts below do.

Image Source: Zacks Investment Research

These are impressive numbers, any way you look at them. The momentum on the revenue front is notably striking, both in terms of the growth rate, as well as the beats percentages.

What is Expected for 2021 Q2 & Beyond?

Looking at Q2 on a blended basis, combining the results that have come out with estimates for the still-to-come companies, total earnings for the S&P 500 index are currently expected to be up +88.3% from the same period last year on +22.2% higher revenues, with the growth rate steadily going up as companies come out with better-than-expected results. This would follow the +49.9% earnings growth on +10.3% higher revenues in 2021 Q1.

A big part of the unusually strong earnings growth expected in the Q2 earnings season is due to easy comparisons to last year’s Covid-hit period. But as we have been consistently pointing out, not all of the growth is a result of easy comparisons. In fact, Q2 earnings are on track to be up +27.5% from the pre-Covid 2019 Q2 period and are on track to reach a new all-time quarterly record.

The chart below takes a big-picture view of the quarterly earnings and revenue growth pace.

Image Source: Zacks Investment Research

The chart below shows the aggregate bottom-up quarterly earnings tallies, actual earnings for the reported periods and estimates for 2021 Q2 and beyond, to give us a better sense of the easy-comps question.

Image Source: Zacks Investment Research

The chart below presents the big-picture view on an annual basis. As you can see below, 2021 earnings and revenues are expected to be up +40.6% and +11.6%, respectively, which follows the Covid-driven decline of -13.1% in 2020.

Image Source: Zacks Investment Research

Please note the double-digit earnings growth expected in each of the next two years. This suggests that the market isn’t looking for a one-off rebound this year, but rather an enduring growth cycle that continues over the next couple of years.

To the extent that this growth outlook can improve as we move into the back half of 2021 will determine whether the overall earnings picture is getting better or leveling off.

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>The Tech Sector’s Enormous Earnings Power

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