Amazon Alphabet Microsoft recharge Tech rally

Recharge

Amazon, Microsoft and Alphabet have stolen the spotlight at the end of the week with earnings that knocked the ball out of the court. This likely paves the way for more of the kind of ‘big tech’ stock gains that have driving U.S. indices higher for the last two years. In fact, apart from energy sector profits, which continue to recover from losses in year-ago quarters, tech sector third-quarter earnings have outshone all others so far. On Friday, the tally of S&P 500 Technology sector income growth in Q3 was 18.4%, according to Thomson Reuters, with about 70% of the industry having reported. 91% of tech earnings beat forecasts, compared to the 74% level for the S&P 500 as a whole.

Waiting for YouTube

As for giants that have capped off this week’s technology releases, helping fuel a rise across global markets, investors signalled their satisfaction with strong after-hours share price rises on Thursday, and this carried through to Friday. Alphabet’s contribution was $27.8bn revenue that narrowly beat expectations, whilst $9.57/share profit topped forecasts by some 15%. Most importantly, investors eyed a 21.4% rise in ad revenue and a continued surge in YouTube. At an estimated 7% of Alphabet’s ad revenue so far in 2o17, YouTube, still barely ‘broken out’ in Google earnings, is being viewed as the group’s not-secret weapon going forward.

Amazon spends big for big spenders

Amazon’s quarter was no less impressive in its own idiosyncratic way. Profits are of course still not a priority at the retail-to cloud-to streaming behemoth, but feel the growth. A 34% revenue rise in Q3 was a tad above Amazon’s long-term run rate and Amazon Web Services, the group’s profit centre, is still going strong. True, margins are beginning to creak as Alphabet and Microsoft competition bites. Additionally, massive expenditure plans—like those that will see more than $7bn spent fulfilling orders to more customers next year as logistics costs rise—have no apparent end in sight. But investors are likely to keep brushing aside valuation concerns as the free cash flow generation destined to pay for most of that growth was $8bn over the last 12 months.

Microsoft’s Azure assures

Microsoft also boomed in cloud In Q3. There were solid rises in both earnings ($6.6bn) and revenues ($24bn) and growth rates now look durable after the group’s successful transition to subscription models across most of businesses. The cloud unit, Azure, grew 90% over the year to Q3, partly as large corporations sought to ensure alternative systems in case of AWS outages. The stability of Microsoft’s businesses as well as the remaining potential for growth cements its place in the fast lane of Big Tech.

The Big Picture

A big picture view of NASDAQ’s daily chart shows that the uptrend remains supported. Clear of current levels which connect highs back to the last day of 2015, momentum should increase. Only if retracements become disorderly—say with a fast down leg to the most recent and obvious kickback support on 21^st September—would sentiment potentially change significantly. The market’s reaction to quarterly reports from the remaining tech giants, Facebook and Apple, on 1^st and 2^nd November respectively, will go a long way to deciding what happens next.

Figure 1 - NASDAQ 100 price chart (daily intervals)

Source: Thomson Reuters and City Index