Profit YoY growth of 34%! The "Fab Five" may support the US stock market in Q3 earnings season.

Tech giants' earnings reports will be released one after another this week. As concerns about the US stock market seem to be growing, investors are hoping to see good news about the performance of large tech companies in this earnings season.

Netflix and Tesla are scheduled to release tech-related earnings reports on Wednesday, while Alphabet (Google's parent company), Microsoft, Amazon, and Meta will announce their earnings reports next week. Apple will release its report on November 2nd, and Nvidia will release its report on November 21st.

The current expectation is that the "Fab Five" of tech companies will support the profitability of the S&P 500 index. After cutting thousands of jobs to reduce costs, the largest tech companies in the US are generating profits similar to those two years ago, when the pandemic was in full swing and there was a significant increase in demand for digital services and electronic devices.

Apple, Microsoft, Alphabet, Amazon, and Nvidia are the five largest companies in the S&P 500 index, accounting for about a quarter of the index's total market value. According to Bloomberg, analysts estimate that the profits of these five companies in the third quarter are expected to increase by an average of 34% compared to the same period last year.

The overall profitability of the S&P 500 index constituents does not appear to be as strong, with expectations of remaining relatively flat. However, without these five tech giants, the index's profitability level would face a decline of about 5%. Market expectations are that the profits of the "Fab Five" will help offset the weakness in industries such as energy and healthcare.

Gary Bradshaw, portfolio manager at Hodges Capital Management, said:

"The performance of large-cap tech stocks is very important and can boost market confidence across the board. Wall Street expects all of these companies to have good earnings. Large-cap tech stocks have everything it takes to lead the market in the last quarter of this year."

Tech stocks have been struggling this month, with rising US bond yields causing market unease. Concerns about inflation and the escalation of conflicts in the Middle East have intensified worries about a US economic downturn. The tech-heavy Nasdaq 100 index has already experienced two consecutive months of decline.

However, the performance of the Nasdaq is still far better than the overall market. The five major tech companies have contributed significantly to the S&P 500 index's 13% gain this year.

Mike Bailey, research director at asset management firm FBB Capital Partners, said that after a strong performance in the second quarter, "we need to see more of the same in the third-quarter earnings." Given their significant weight, "you can bet that as the earnings of large tech companies are announced this quarter, other companies in the market will follow in their footsteps."

Potential Obstacles: Overvaluation or the Digestion of Positive News May Bring Profit Pressure to Companies

Analysis points out that a potential obstacle to the stock market's rise driven by earnings reports is that many anticipated positive news may have already been priced in. Alphabet and Amazon have seen gains of over 50% this year, while Apple and Microsoft have seen gains close to 40%.

In addition to rising earnings expectations, these large tech stocks have also benefited from people's bets on generative AI. NVIDIA's stock price has doubled this year, making it the only company to receive significant financial boost from this trend.

Investors are concerned that even with recent stock price declines, the valuations of large tech companies remain high. Apple and Microsoft have price-to-earnings ratios of around 27 and 29 respectively, far above the average level of the past 10 years. For the overall S&P 500 index, this number is around 18.

Kim Forrest, founder and chief investment officer of investment bank Bokeh Capital Partners, said that expensive stock prices bring pressure to companies to achieve strong profits.

Forrest said in a media interview:

"They must constantly deliver on performance promises, otherwise they will lose investor attention, and someone needs to continue buying, these high valuations need to be proven."

Walstreetcn previously mentioned that compared to the previous earnings season, investors are more convinced that US companies are about to end a year-long profit decline. However, fragile economic prospects, cautious consumers, and the highest interest rates in sixteen years mean that the US stock market may have only gained a temporary respite.

Gina Martin Adams, Chief Equity Strategist at Bloomberg Intelligence, said that the outlook for S&P 500 companies should finally show slight improvement in the third quarter, but the recovery remains fragile and lacks breadth.

Adams said that although the momentum of estimates has strengthened, profit margins "need to remain strong" except for the energy sector, and the prospects for economically sensitive sectors need to "improve" in order to instill confidence in stock market investors.

However, gaining such confidence may become increasingly difficult. High interest rates have put pressure on both consumers and businesses, and even luxury goods manufacturers like LVMH have warned of slowing consumer demand after performing strongly in high inflation. The Israeli-Palestinian conflict may also disrupt the global economy.