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In the run up to Halloween, there’s been plenty to spook investors. Governments across Europe and the Americas have looked to meet rising infection levels with further restrictions, sending shivers down the spines of their beleaguered economies. Meanwhile, the spectres of the US presidential election and Brexit talks loom ominously in the background. Global markets now look on course for their worst week since March.
While markets struggle, however, the big US tech stocks continue their relentless rise to the top.
The five biggest companies on the US S&P 500 announced their Q3 earnings this week: Microsoft on Tuesday; Apple, Amazon, Facebook and Alphabet, the parent company of Google, yesterday. Each, predictably, defied everyone’s predictions.
Yesterday’s cohort managed combined sales of $227 billion, an 18% rise year on year, 4% higher than expected.
Google was the biggest winner. After suffering its first ever revenue decline last quarter, earnings from its advertising business were well above what analysts expected, with overall revenue of $46.2 billion up 14% year on year.
Facebook’s revenue grew 22%, as the company also profited from gains in its advertising business - despite a well-publicised advertiser boycott of the platform.
Amazon’s growth of 37% was slightly down on the previous quarter, but its net income of $6.3 billion still represented a $4.2 billion increase on last year, beating Wall Street expectations by 71%.
Finally, despite a delayed launch to the iPhone 12 which meant its sales were not included in this quarter’s results, Apple recorded revenue of $64.7 billion, up on expectations of $64 billion. Revenue was buoyed by increased Mac and iPad sales, as well as wearables and services.
But there was a twist in this quarter’s edition of “Big Tech saves the day”.
For much of 2020, those five companies have used their collective might to drag US markets up by the scruff of the neck. They account for more than a fifth of the value of the entire S&P 500 and have been responsible for perhaps a third of the rally in stocks since the market low in March.
Amazon’s stock alone has risen 66% this year; Apple’s just under 80%. And yet, despite defying everyone’s expectations once again, both saw their stocks fall in after-hours trading following the earnings reports. Investors have by and large shrugged off the results and remained downbeat.
Warren Buffett tells us that “price is what you pay, value is what you get”. The instinct has always been to take encouragement from Big Tech’s fundamentals and profits and assume that these justify the sky-high valuations they’ve sustained throughout this year.
But the earnings we’re seeing this week are all backward-looking, reflecting a remarkable set of circumstances in 2020 that have disproportionately benefitted a handful of stocks. Investors appear to be growing increasingly anxious over whether these backward-looking earnings will bear any resemblance to those of a post-COVID future.
That anxiety means we’ve come to expect a lot from these companies - many people’s portfolios are dependent on them. Simply matching expectations is no longer enough.
The millions of investors who have ploughed their savings into Apple are now inadvertently betting that the new iPhone 12 is a huge success, one able to justify the firm’s current Price to Earnings (P/E) ratio of 35 times earnings.
Similarly, we’re placing a lot of faith in advertising revenues continuing to improve, even when they’re far from assured from global economies encumbered by recession. Investors also may have been affected by the example of SAP, another large software company, which earlier this week saw its share price tank after the company cut its forecasts for 2020 and beyond.
And there’s an additional ghoul creeping up on the horizon. Yesterday’s results followed shortly after another congressional grilling for the chief executives of Facebook, Twitter and Alphabet. The latter has become the subject of a landmark antitrust case, accused of acting illegally to protect its 92% of the global search market, partly by cutting deals with other Big Tech firms like Apple.
These are turbulent times for tech. Their position in a changed world is clear, but investors have known that for a while now. And if the world does return to normal, will Big Tech be left wishing it hadn’t? Markets aren’t sure - but then again, in the words of Sheriff Leigh Brackett, “it’s Halloween, everyone’s entitled to one good scare.”
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. 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 an authorised financial adviser.
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