What to Expect From Technology Sector Earnings

Originally published November 1, 2024

Last week marked the start of Q3 earnings season for the technology and communication services sectors. That means market participants will gain insight into key factors. Those factors include AI spending, internet advertising, and semiconductor demand, among others.

Upcoming earnings reports from widely followed mega-cap growth companies also mean tests are looming for ETFs like the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Those two ETFs allocate about two-thirds of their rosters to technology and communication services equities.

Issues analysts and investors will be focusing on specific issues with tech earnings. One is potentially tough YoY comps that could imply difficulty in materially exceeding Q3 2023 numbers. Another is the abilities of QQQ/QQQM member firms to continue impressive rates of margin expansion. If large- and mega-cap growth names can answer those calls, these Invesco ETFs could generate more upside into year-end and beyond.

Margins Matter

Communication services and technology companies have long been margin expansion stars. They've paved the way for some of the most prodigious rates of free cash flow generation in Corporate America. Arguably, investors have gotten “spoiled” by the rate at which large growth companies have increased margins. That means that will be a widely monitored issue when earnings reports from these sectors trickle in over the coming weeks. In the second quarter, a host of QQQ/QQQM holdings were margin standouts.

“Chip-leader Nvidia (NVDA) drove a good deal of the annual improvement in both earnings and margins sector wide as its business continues to grow parabolically amid AI chip demand,” according to Charles Schwab. “But traditional tech stocks like Apple and Microsoft, as well as cloud leaders like Alphabet (GOOGL) and Amazon (AMZN), were no slouches, either.”

Tech stocks, including QQQ/QQQM holdings, were largely lethargic over the course of Q3 as investors embraced other sectors. But some market observers argue that rotation has effectively been baked into growth stocks. They feel its time as a headwind is limited.

Another positive attribute to consider with tech earnings looming is the point that analysts widely expect EPS for the sector to increase. With that in mind, it’s likely attention will shift to AI forecasts.

“AI remains front and center. It's the focus of heavy spending by cloud, internet ad, and device [companies. But it's] also a possible profit driver down the road. The debate continues to rage about whether the costs will ultimately be [justified. And] investors increasingly will ask companies to ‘show me the money’ in coming quarters,” added Schwab.

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What to Expect From Technology Sector Earnings

Margins Matter

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