Q3 Hopes Hanging on Apple Earnings?
Today is a big day for the Technology sector, with earnings reports from Apple (AAPL) and Amazon (AMZN) after the close, and the introduction of Microsoft’s (MSFT) highly anticipated Windows 8 operating system and Surface tablet.
Earnings reports aside, the weekly Jobless Claims and monthly Durable Goods reports this morning both came out better than expected, helping set the stage for some optimism in today’s trading session.
The third quarter earnings season has been quite weak overall, but results from the Tech sector have been even weaker. As of this morning, we have results from 216 companies in the S&P 500 or 43.8% of the index’s total members. Total earnings for these 216 companies are down 3.1% from the same period last year, with only 58.8% of the companies beating earnings expectations.
On the revenue side, total revenues for these 216 companies are up 1% from the same period last year, but only 36.6% of the companies have come ahead of revenue expectations. This is the weakest quarterly earnings performance for these 205 companies in quite a while and puts the S&P 500 on track for producing the weakest earnings show thus far in the earnings recovery cycle that got underway in late 2009.
By far the weakest sector in the S&P 500 remains the economically sensitive Basic Materials sector, with total earnings down 36.9% and less than a quarter of the companies coming ahead of earnings expectations (only 14% of Basic Materials companies are beating revenue expectations). While the Tech sector is not the weakest in the S&P 500 thus far, its performance has definitely been weaker than the aggregate index results, and that is a big climb down for this otherwise growth leader.
Ahead of the Apple report this afternoon, we have results from 52.2% of Tech sector companies, with total earnings for these companies down 7.5% from the same period last year. Importantly, only 52.8% of the Tech companies have beat earnings expectations. This is far weaker performance than what these same companies have produced in recent quarters.
The composite Tech sector earnings growth rate for the quarter, when we combine the reports that have come out with the reports that have still to come (including the Apple report this evening), is still modestly down (negative 0.2%). If we exclude Apple from the composite number, the sector’s quarterly earnings growth rate drops to negative 5%.
Amazon is not much of an earnings story, given the company’s fixation on growth and market share. It will be interesting, however, to see how the company perceives the competitive challenge to its Kindle Fire tablet from Apple’s iPad mini. Unlike Amazon, Apple is a big deal on the earnings front, as it alone brings in roughly 20% of the Tech sector’s total earnings and carries enormous weight in the stock market indices.
The overall trend on the estimate revisions front has been on the negative side lately, with the current Zacks Consensus estimate for the quarter of $8.85 for the quarter down from $8.93 seven days back. We see a similar trend for annual estimates for this year and next.
Zacks ESP or Earnings Surprise Prediction, our proprietary leading indicator of earnings surprises, is showing both Apple and Amazon coming short of earnings expectations in their reports today. Should the Zacks ESP turn out to be accurate, the earnings reports from these two Tech leaders will be in-line with what a majority of their peers have come out with this earnings season.
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