Earnings reports from US tech giants are bombarding us! It's a crucial moment that determines global risk appetite.

According to the Zhongtong Finance APP, in the coming week, major US technology companies will release their earnings reports one after another. The key performance data of these tech companies will become the focus of global markets, and their performance may affect the risk appetite of global stock investors. Global technology industry leaders such as Microsoft (MSFT.US), Alphabet (GOOGL.US), the parent company of social media platforms Facebook and Instagram, Meta Platforms (META.US), and Amazon (AMZN.US) with a revenue scale of hundreds of billions of dollars will all release their earnings reports this week. At the same time, high-weight components of the S&P 500 index such as Coca-Cola (KO.US) and ExxonMobil (XOM.US) will also release their latest earnings reports this week.

If the earnings reports and performance outlook data of these large tech companies with significant weight exceed expectations, it could greatly boost the overall EPS of the S&P 500 index and the future EPS expectations of the index, which would mean that the bullish trend in the US stock market may only be a matter of time. Stuart Kaiser, the head of US stock trading strategy at Citigroup, said that in the next few days, major US tech giants will release their earnings one after another, which may bring the stock market back to the "typical earnings season mode."

In terms of economic data, investors will closely watch the preliminary estimate of US GDP for the third quarter, which is expected to show a significant increase in the annualized quarterly rate to 4.3%. On Friday, the preferred inflation indicator of the Federal Reserve will be released.

Can the earnings reports of these major tech giants save the sluggish US stock market?

At the moment when the quarterly earnings reports of these large tech companies are released, the global stock market is at a critical moment. Last week, the global tech stock benchmark, the Nasdaq 100 index, fell by more than 3%, the benchmark US stock index, the S&P 500 index, fell by more than 2%, and the Dow Jones index fell by more than 1.6%. The S&P 500 index may even experience three consecutive months of decline.

In the past month, the yield on 10-year US Treasury bonds, known as the "anchor of global asset pricing," has risen to its highest level in 16 years, reaching over 5% at one point, which has severely impacted global risk assets including stocks and corporate bonds. In addition, uncertainties surrounding when the current round of interest rate hikes by the Federal Reserve will end and how long interest rates above 5% will be maintained have put pressure on global stock markets.

From the perspective of the DCF model, although the 10-year US Treasury bond yield, which corresponds to the denominator indicator "r" in the DCF valuation model, has reached its highest level since 2007 and remains high, if the numerator indicator, which is the expected cash flow, can continue to improve, it can significantly increase the pricing range of stocks and other risk assets, that is, raise the valuation level of risk assets.And the expected cash flow at the molecular end is largely based on the performance of the earnings report season. Therefore, whether the company's profit is revised upward, especially whether the earnings per share can exceed expectations, is crucial for the pricing trend of global risk assets such as stocks.

If the final actual data shows that large technology companies such as Microsoft and Meta, as well as their earnings guidance data, collectively exceed expectations, it will greatly boost the overall EPS of the S&P 500 index constituent companies and analysts' expectations for the future EPS of the S&P 500 index. This in turn means that the bullish trend in the US stock market may only be a matter of time. In addition, according to the Bloomberg model, performance factors may have a greater impact on stock prices during the earnings season than interest rate expectations.

Bloomberg statistics show that since the beginning of 2021, the proportion of actual EPS indicators of S&P 500 constituent companies exceeding analysts' expectations has remained at around 80%. Historical data over the past 30 years shows that approximately 60% of S&P 500 index constituent companies have had earnings per share that exceeded analysts' general expectations in a given quarter.

Goldman Sachs recently stated that based on past situations, the earnings season is likely to be a period of abundant harvest for the US stock market, especially for tech giants. Goldman Sachs cited historical data, stating that the upcoming third-quarter earnings may catalyze a reversal in the momentum of large technology stocks. Since the fourth quarter of 2016, the performance of large technology companies has exceeded analysts' general expectations for 81% of the time.

Among the "Magnificent Seven" tech giants that have greatly driven the rise of the US stock market in 2023, four of them will provide the latest quarterly earnings reports this week, laying the foundation for the overall stock trend that may affect the three major US stock indexes. Tesla released its earnings report last week, Apple is expected to release its earnings report next week, and NVIDIA's earnings report is expected to be released in late November.

Analysts' expected data shows that the five major tech giants, including Apple (AAPL.US), Microsoft (MSFT.US), and Google's parent company Alphabet (GOOGL.US), are expected to achieve a 29% year-on-year increase in profits in the three months ending in September. This is expected to drive the overall EPS of the S&P 500 index to narrow the decline from a 6% year-on-year decrease in Q2 to a significant decrease of 0.5%.

Among them, the profit growth of the top 5 tech companies will continue to outperform other S&P constituent companies, with an expected year-on-year increase of 29% in the third quarter.

In a report on October 12, Bank of America's investment strategists pointed out that if the US stock market did not have the "Magnificent Seven" tech giants, the S&P 500 index would be slightly below 3,900 points, which is about 10% lower than the closing level on Friday.On the company's earnings report, these four large tech companies will provide the latest updates on consumer spending, AI revenue, and insights into the advertising industry that reflect the US macroeconomy. Microsoft and Amazon will also continue to focus on revenue figures in the cloud business.

"The story of AI is expected to depend on specific companies," wrote the analyst team at UBS. "In our view, Meta, which benefited from AI in the previous quarter, still has more room to fulfill the revenue promises brought by this revolutionary technology."

Lloyd Walmsley, an analyst at UBS, wrote in a research report, "We are optimistic about Meta. Although performance expectations for the fourth quarter have been raised, we believe that the consumption of various AI-driven apps under Meta has not been fully recognized and reflected in the stock price."

Analyst Dan Ives from Wedbush stated that Google and Meta are "in a favorable position" and both will benefit from the growth of digital advertising. Ives cited data collected by research firm Skai, which showed a "healthy" background for digital advertising in the third quarter. The company's data showed that spending exceeded $9 billion in the past five quarters, using only accounts that had spent continuously for 15 months. The research firm also stated that retail media spending on these accounts increased by 35% YoY, and paid search spending increased by 5% to 6%, higher than the 3% in the previous quarter.

Regarding Google's performance expectations, Ives said, "We expect Google's operating profit margin to remain around 28-29% by 2025, supporting strong FCF generation (by FY2023, FCF margin will reach 30.4%, and by 2025, it will reach 34.6%), while the company will invest in three priority areas: AI, retail business, and YouTube."

Meanwhile, Walmsley's colleague Karl Keirstead believes that Microsoft will not make a meaningful contribution in AI this quarter. Keirstead wrote in a preview report on Microsoft, "Although the key AI boost will not come in the first quarter, i.e., the quarter ending in September, the stock structure is now more transparent, and long-term performance growth expectations are clearer."

Analyst Dan Ives from Wedbush predicts that over half of Microsoft's users will use Copilot in the next three years. "Although management has talked about the gradual rise of AI monetization in the 2024 fiscal year, according to our recent survey, the pace of AI application has been faster than expected so far."Dan Ives said.

With a series of heavyweight economic data releases, will the 'anchor of global asset pricing' continue to soar?

Since the Federal Reserve's interest rate decision in September, US bond yields have been soaring. The yields on 10-year and 30-year Treasury bonds are at their highest levels in 16 years. Some Federal Reserve officials have stated that the rise in yields could effectively replace another interest rate hike by the Federal Reserve, meaning that the recent surge in US bond yields is equivalent to an increase of about 25 basis points.

Before the next meeting starting on October 31st, Federal Reserve officials have entered a "quiet period" this week and are unable to make public statements. "CME FedWatch" data shows that the market expects a more than 96% chance that the Federal Reserve will announce no rate hike at the upcoming meeting.

Federal Reserve Chairman Powell delivered a speech last Thursday, providing an update on the current state of the US economy. He still believes that inflation is "too high" and may be threatened by a "very resilient economy". Economists believe that Powell's speech may have closed the door to a rate hike in November, but left the option open for future meetings.

In a research report on Friday, Greg Daco, Chief Economist at EY, wrote, "A recent series of positive economic surprises will keep the Federal Reserve vigilant about high inflation. Although the Federal Reserve may not raise rates again at the November meeting, the December meeting will remain 'open' to a large extent."

In the coming week, we will see the indicators closely watched by the Federal Reserve: economic growth and inflation data. The preliminary estimate of US GDP to be released on Thursday is expected to show that the US economy reached a peak in economic growth in 2023, with the data expected to show a significant increase in the annualized quarterly rate to 4.3%. A series of resilient data has already pushed back predictions of an economic downturn to at least the second half of 2024.

The data to be released on Friday is expected to show that the "core" personal consumption expenditure (core PCE) excluding food and energy costs increased by 3.7% in September compared to the same period last year, lower than the 3.9% in August. The Federal Reserve's target inflation rate is anchored at 2%. Compared to the previous month, core PCE in September is expected to increase by about 0.3% on a month-on-month basis.

"It's either a slowdown in growth or the start of inflation rising," wrote Michael Gapen, economist at Bank of America. "If economic growth slows, the Federal Reserve may not need to raise rates again. But if inflation, this key data point, picks up, further rate hikes would be reasonable."Kristina Hooper, Chief Market Strategist at Invesco, said, "Once the Federal Reserve clearly indicates that the rate hike cycle has ended, we will have a better understanding of the upcoming rate cuts in 2024. For me, this will mark a significant shift in the market, and investors may be more willing to chase risks. We may see a widespread decline in US bond yields."