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Microsoft and Alphabet earnings in focus as tech rally falters

Stock bulls who rode megacap tech shares to double-digit gains this year have had little reason to stick around lately. Now they’re counting on earnings from Microsoft Corp. and Alphabet Inc. after markets close Tuesday to help restart the rally.

Rising rates have made already stretched tech valuations look increasingly expensive just as China and the US step up tit-for-tat regulatory restrictions. Israel’s war against Hamas has made risk assets a more dangerous bet. And the Federal Reserve’s next moves hang over it all. Still, with virtually nowhere else to turn in the equity market, Big Tech remains the most-crowded trade among fund managers, according to Bank of America Corp.

That’s prompted investors to pay up for protection against a selloff in Alphabet and Microsoft — two of the handful of heavyweights responsible for all of the S&P 500 Index’s advance this year. Investors are banking on them to deliver earnings growth big enough to push the stocks higher — or at least enough to justify this year’s gains.

“There is no room for them to falter whatsoever,” said Michael Mullaney, director of global market research at Boston Partners. “If you think about the amount of money that’s gone into index investing, particularly the S&P 500, if any one of these companies falter then there’s going to be selling pressure because everyone and their brother is overweight.”

The five biggest companies in the S&P 500 Index — all of them tech-related — generated the bulk of the index’s 10% gain this year. Add in a couple of other heavyweights like Tesla Inc. and Meta Platforms Inc., and that’s all of this year’s advance and then some. Bank of America’s fund manager survey showed last week that betting on more gains for Big Tech is seen as the most crowded trade.

Their earnings have been a key support: They’re expected to deliver average profit growth of 34% in the third quarter, according to analyst estimates compiled by Bloomberg Intelligence. The rest of the S&P 500 is expected to show a profit drop of about 5%. The benchmark index is up 0.8% on Tuesday.

Microsoft’s and Alphabet’s results will be followed by Facebook owner Meta on Wednesday and e-commerce behemoth Inc. on Thursday. Apple Inc. and Nvidia Corp. are due to release results next month.

With so much riding on the group, there have been signs of skittishness among investors ahead of the week’s results, given the broader market’s retreat since August. Apple and Nvidia have each dropped more than 10% from recent peaks amid concerns about sales in China, which is locked in an ongoing tussle with the US over advanced semiconductor technology. Electric-vehicle maker Tesla has declined 13% after a disappointing earnings report last week.

Other hints lie in the options market. The cost of puts — which protect against declines in a stock — relative to the cost of calls — which profit if a stock rises — has climbed for megacap tech shares. That signals investors are increasingly seeking protection from share-price drops in the near-term. That’s a reversal from earlier in the year, when desire to chase upside in the stocks pushed up the cost of calls instead.

When Microsoft reports, much of the focus will be on the performance of its Azure cloud computing business, where sales are expected to rise 27% compared with the same period last year, according to the average of analyst estimates compiled by Bloomberg. Alphabet will give investors a glimpse into the rebound in the market for digital advertising that accounts for the majority of its revenue. The Google owner’s total sales are projected to rise 10%, which would be its best growth in five quarters.

Both Microsoft and Alphabet are seen as front-runners in generative artificial intelligence. So far, the technology hasn’t been a major contributor to financial results. However, analysts are expecting that to change in the coming year, making forecasts particularly crucial.

“We’re looking for reasons for the market to turn around and start to advance again,” said Jason Benowitz, senior portfolio manager at CI Roosevelt. “Given how prominent big technology companies are in terms of contribution to total earnings, the reports for big tech earnings could be a catalyst to turn the market positive.”

Two of the most profitable firms kick off the big tech earnings week after markets close on Tuesday as Microsoft and Alphabet report. Meta and Amazon are slated to report later in the week. The four mega-caps combined generated $53 billion in profits last quarter. Bloomberg

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