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Stock markets have started the week on a cautious footing, waiting for news from the US that is likely to set the agenda for the winter ahead.

And for once it is not the upcoming Presidential Election grabbing the attention. As important as the race for the White House is to markets, probably of bigger significance in the short term is the performance of the soar-away tech giants, most of whom report earnings this week.

Facebook, Amazon, Alphabet (parent of Google) and Microsoft all provide updates with investors on the lookout for signs that current high valuations can be delivered upon. The tech sector has provided most of the running for not just US but global stock markets this year, helping indexes defy worsening economic performance that has suffered badly in the pandemic. Any underperformance from these companies will sow doubts that the market can continue to defy gravity.

There was an ominous foreshadow last week when Netflix - the final component of the ‘FAANGs’ - reported its latest subscriber numbers and revenues. The streaming service notched up $6.44bn in sales, which was ahead of forecast, but was still punished because new subscriber numbers were some way below estimates. Netflix stock fell around 6% the day after the numbers were published.

That underlined how high expectations for tech has become, and how large the scope for disappointment is if trading slows at all.

Apple will report on Thursday with eyes firmly on iPhone sales. This month’s launch of the iPhone 12 was delayed and analyst expectations of more than 40million handset sales look challenging. Apple will hope that improving revenues from services can make up for any shortfall and provide some good news for the market to hang on to.

At Alphabet, which also reports on Thursday, attention will be on ad revenue after the second quarter saw the first ever fall in the metric. A recovery is expected but the company has tough full-year expectations to meet. Bubbling in the background is new legal action from the US Justice Department accusing Google of running a monopoly in search engine results. The action is expected to drag on for years and will cast a shadow over the company while it continues.

For Amazon, 2020 has already been a remarkable year and investors will mostly be watching future guidance when the company reports after trading closes on Thursday. Amazon blew past revenue expectations in the second quarter, reporting bumper earnings-per-share above $10 - almost double the same figure from a year before. Trading in the third quarter is expected to have been similarly brisk - with particular attention on the fast-growing Amazon Web Services division - but investors will look first and foremost for guidance on the fourth quarter to see if Amazon can continue its winning streak.

The job at Facebook, meanwhile, is to reassure the market that a decline in earnings-per-share from the second quarter can be reversed, and that slowing growth in monthly active users is a temporary blip. Facebook has had a mixed pandemic in terms of trading, with lockdown leading to higher use of the platform, but recession causing a pull-back in ad spend.

Finally, Microsoft is expected to have added to its strong run during 2020. The shift to home working has accelerated spending on the company’s products and services and, as with Amazon, investors will be hoping for a big revision upwards in forward-looking profit guidance.

With so much of the overall market level now tied up with this small cabal of mega-companies, the stakes could not be much higher going into this week.

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.

Topics Covered

Shares; Volatility; Active Investing; North America

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