Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The long bank holiday weekend comes at a good time. It provides some welcome respite after a week crammed full of company earnings reports.

Unlike a share price, which shows how investors value a company, earnings reports tell us how well the company is actually doing. They’re a helpful reminder of the tangible asset you hold when you buy a stock. This earnings season has taken on an intriguing subplot, as investors try to suss out whether the latest in a line of apparent “value rotations” is the one to stick around.

The thinking goes that a broad economic recovery should help the out-of-favour “value” companies that suffered during the start of the pandemic, and harm the “growth” stocks whose game-changing technologies and pharmaceuticals helped see their share prices rocket.

Growth stocks will typically look more expensive relative to their earnings than value. When you buy a growth company, you’re thinking about its potential to deliver rising earnings long into the future, rather than exploiting a discount in its price now. A strong earnings season from the growth companies may remind investors of the potential they have to offer and help justify their sky-high valuations. A weak one could confirm that value companies are the place to be right now.

With reports coming this week from the growth-focused Big Tech firms as well as traditional value sectors like energy and financials, a clearer picture is starting to develop.

Big Tech

A big week for Big Tech delivered some big numbers. Facebook, Apple, Amazon, Microsoft, Tesla and Alphabet (parent company of Google) have all been under the spotlight.

Between them, these companies hold huge sway over the wider US market. The six above make up around 23% of the total weight of the S&P 500 index of the US’ largest companies.

Such is their influence that, along with reports of surging GDP growth in the US, extremely strong earnings reports this week pushed the index to a record high yesterday.

Apple was one standout. The company enjoyed its best ever start to a year with total revenues easily beating forecasts to rise 54% over the first quarter. Every region grew by at least 35% - revenue in Asia-Pacific was up 94%.

Facebook also celebrated a record quarter, buoyed by a rise in digital advertising to see its profits almost double. Another to ride the wave of rising advertising profits was Alphabet, which posted a record quarter of its own, while Amazon reported a second straight quarter of over $100 billion in sales.

Over the coming months, there will be mounting focus on whether Big Tech’s grasp on the market will outlive the pandemic. Advocates of the value rotation will certainly be keen to underplay the ongoing relevance of these companies. So far, however, they show little sign of slowing down. It may be that they’ve already cemented their role in our lives well beyond 2020.

Banks

Standing at the opposite end of the growth/value spectrum is the financial sector. Banks would be one of the prime beneficiaries of a reopening economy, which would help their net interest margins to widen and lending activity to rise.

Most banks took large provisions last year, with many forced to cancel dividend payments, in order to shore up their balance sheets. However, government support measures such as the furlough scheme and rescue loans have kept loan performance relatively robust. Now, a genuine optimism is brewing around the sector.

HSBC, Lloyds and NatWest all announced that they would be releasing cash they no longer needed to cover bad loans. That helped push their profits up over the quarter. Profits at HSBC surged 79% compared with the same time a year ago, aided by both the reduction in cash reserves and an increase in lending.

Though electing not to release its capital store, Barclays too posted bumper results, with net profit almost tripling over the first quarter compared to the same period last year. Accompanying today’s report, chief executive Jes Staley told the BBC that the UK is on course to grow at its fastest rate since 1948. “That’s pretty spectacular”, he said.

The feeling was more reserved at NatWest, which released far less cash then both HSBC and Barclays. It also struck a more cautious tone over growth forecasts and the ongoing uncertainty of the pandemic. Nevertheless, quarterly pre-tax profit of £946 million smashed city expectations of £536 million.

Oil

Like the banks, oil companies such as BP and Royal Dutch Shell had a torrid 2020. And, again like the banks, an economic pickup would serve them well.

Brent crude has kept roughly above pre-pandemic levels since February, supported by supply cuts and demand increase. The situation for the oil majors should improve further as economies reopen and travel resumes.

The earnings reports from both companies established promising platforms from which to build. BP reported a quarterly profit of $3.3 billion, its biggest since the pandemic began and a significant improvement on the same period last year, which saw a loss of $628 million.

The company also announced that it will begin to buy back the shares it paid to investors last year in lieu of dividends, generating around $500 million in windfalls to investors.

Shell also beat analyst expectations, but unlike BP it has not yet met its net debt target. Once it does, it will follow BP in distributing cash flows to investors via either dividends or share buybacks. It also raised its quarterly dividend by 4%, though that’s still some way off the two-thirds it cut it by a year ago.

What next?

That’s the big question after every earnings season. Earnings reports are by their nature retrospective, but what really matters to investors is what’s to come.

Nevertheless, they’re a helpful tool for investors trying to work out if a stock justifies its valuation. And while the value sectors have offered hope of a resurgence amid more favourable market conditions, it’s impossible to ignore those Big Tech numbers. The big, defensive, growth companies are not going down without a fight.

Important information: Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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