US earnings season summary

Our head of markets judges the success of the US corporate results and implications for stock markets.

Despite the previous concerns of the US/China trade spat and latterly the outbreak of the coronavirus – the economic impacts of which remain unknown – the US has continued its progress apace.

The fourth-quarter earnings season saw 71% of US companies beat estimates, with analysts now suggesting aggregate fourth-quarter earnings increasing at a 2.5% annual rate, a stark reversal from the 0.3% decline seen at the beginning of the year.

The indices have responded in kind with the Dow Jones already up 3% this year, and the S&P500 4.6%.

However, it has been technology stocks and the Nasdaq – up a whopping 8.5% in the year to date – which have powered growth.

Microsoft (NASDAQ:MSFT), for example, is 16% ahead in 2020 so far.

Seemingly having previously lost its way with Windows phone software, Microsoft has now revived its fortunes. Its move to build on its cloud server business has paid off handsomely.

For investors, Microsoft shares have regained their former growth tag, as evidenced by a current forward price/earnings (PE) ratio of just over 30. This well-run tech company gives investors exposure to parts of the economy and industry catalysts that are difficult to find elsewhere. For many investors it remains a must-own stock.

Apple (NASDAQ:AAPL), up nearly 10% so far this year, had no trouble meeting the lofty expectations of investors as it produced record results following its Christmas quarter.

Stronger-than-expected iPhone sales drove the 9% jump in revenues to $91.8 billion in the three months to December 28, with the resulting 19% rise in earnings per share to $4.99 also an all-time high for the California-based company.

With Apple's trading performance still robust, the biggest uncertainty appears to be the potential impact of coronavirus. China is the company's third largest market with sales of $13.6 billion in the most recent quarter, with the majority of Apple's suppliers based in the country.

Even so, its user base of 1.5 billion active devices continues to benefit from the likes of Apple Music, Apple Pay and now Apple TV+, with the streaming service launched in November as a rival to the likes of Netflix (NASDAQ:NFLX)and Amazon (NASDAQ:AMZN) Prime. 

If Apple is smartphones and Microsoft operating and business software, Alphabet Google is synonymous with the internet and the ability to search its now endless data. 

The shares are 12% ahead in the year to date, with the company now investing in cloud centres to host ever increasing amounts of data. Its Google (NASDAQ:GOOGL) Nest devices compete with Amazon’s Alexa, while its self-drive Waymo vehicle business could one day compete with Ford (NYSE:F) or Tesla (NASDAQ:TSLA).

For investors, slowing revenue growth and a change of leadership generate some caution. But a breakout of its various revenue streams adds transparency, it has recently made bolt-on acquisitions for its cloud business, while a forward price/earnings ratio below the three-year average provides encouragement.

Finally, Amazon, whose shares are up nearly 15% in 2020.

Amazon offers investors the chance to buy into a retail revolution. Often blamed for the demise of physical shopping outlets, the convenience that Amazon has brought to the shopping arena is evidenced by phenomenal growth.

The group’s AWS business also offers attractive growth potential. Microsoft’s recent US government defence win was worth around $10 billion over 10 years. 

For investors, a failure both to beat its September 2018 record high and for its stock market value to consistently exceed $1 trillion, might suggest that the best of its growth is now behind it. But a forward price/earnings (PE) ratio of over 85 implies that investors and analysts anticipate more growth to come. As with the other mighty US tech stocks, the debate about valuation is never far away. 

But Amazon is the retail market leader and streets ahead of the rest; it's why investors keep buying. The real test, however, will be how it copes with the next major economic slowdown.