Why big tech needs to deliver if US indices are to maintain their momentum

“America’s S&P 500 has added $2.4 trillion in market capitalisation so far in 2023 and just six stocks – Meta Platforms, Amazon, Apple, Netflix, Google’s parent Alphabet and Microsoft has provided $1.6 trillion of that gain between them, or two-thirds of the total,” says AJ Bell investment director Russ Mould. “After a lukewarm set of figures from Netflix last week, and a sharp year-on-year drop in first-quarter profits from another tech darling, Tesla, investors will be looking to five of the MAANAM sextet (or FAANGM group as they once were) to deliver good results and upbeat outlooks and help US equity markets maintain the run that began last October.

Source: Company accounts, Refinitiv data, Zack’s, NASDAQ, consensus analysts’ forecasts. Microsoft’s fiscal year runs to June. Apple’s fiscal year runs to September.

“Wall Street already seems geared up for a fairly modest quarter from Microsoft, Alphabet, Meta, Amazon and Apple, as none of them are expected to grow earnings per share (EPS) when compared to the same quarter a year ago in 2022.

“But that only raises the stakes for the second quarter and beyond, especially if the MAANAM names are to justify the huge rally in their share prices and stock market valuations, which is doing so much to lift the US equity market overall. Excluding the MAANAMs, the S&P 500 looks to be making pretty heavy weather of advancing its market cap, confronted as it is by higher interest rates, Quantitative Tightening and higher input costs, including wages, that are pressuring corporate margins.

Source: Refinitiv data

“All five of the MAANAM names yet to report are expected to generate increased sales and EPS in 2023 despite the slow start to the year, so analysts’ earnings forecasts are clearly relying on a strong second half to more than compensate for the first half.

“That seems to run a bit counter to the US Federal Reserve’s admission that America may suffer a mild recession in 2023, especially as these companies are perhaps not as immune to competitive pressures, regulatory oversight and the economic cycle as their peak valuations of 2021 may have suggested.

Source: Company accounts, Refinitiv data, Zack’s, NASDAQ, consensus analysts’ forecasts. Microsoft’s fiscal year runs to June. Apple’s fiscal year runs to September.

“The MAANAM sextet’s aggregate market cap peaked at $10.5 trillion in December 2021 and has since receded to ‘just’ $7.9 trillion. Some investors may be having second thoughts as to just how invincible these names are, as their contribution to the total market cap of the S&P 500 on a percentage basis is still way below its lockdown-inspired peak in 2020, but these six names still look and feel disproportionately influential – were anything unexpected to go wrong, their lofty price tag could become a deadweight for their own share prices and the wider US equity market.

Source: Refinitiv data

“New bull markets tend to start with a change in leadership and bear markets do not tend to end when cult leadership stocks still trade on lofty valuations, so the direction taken by these six names could yet be pivotal.

“Investors might therefore like to ponder how (un)healthy it is for just six stocks to represent a quarter of the S&P 500’s total valuation. Markets tend to cluster in what they see as safe or reliable haven stocks during times of stress or uncertainty, but regardless of how dependable their business models may or may not be, the stocks become inherently less safe the higher their valuations go, as they offer less downside protection in the event something unexpected goes wrong.

“This is exactly what happened with the so-called ‘Nifty Fifty’ of the early 1970s in the USA. They were seen as unassailable by US investors and were bid up to huge valuations only to collapse just like everything else in the 1973-74 bear market when an oil shock, recession and inflation prompted a rout.”