Microsoft , Alphabet and Advanced Micro Devices report earnings after the close Tuesday. Technolgy is expected to be a bright spot this fourth quarter earnings season: it’s the only sector that has seen growth estimates rise since October 1. In the world of corporate profits, Apple , Microsoft and Alphabet have long been heavyweights. Their huge and growing earnings, combined with a large number of shares outstanding, mean that the three companies exert a bigger influence on the S & P 500 earnings picture than any other. Earnings heavyweights (earnings weight in S & P 500) Apple 6.8% Microsoft 4.6% Alphabet 3.8% Nvidia 2.4% Meta 2.4% Amazon 1.6% But despite the dominance of Apple, Microsoft and Alphabet, one company — Nvidia — has seen its earnings increase so fast that it now is becoming a dominant player in the earnings game as well. Much of the tech sector’s improvement comes from Nvidia, which has seen EPS estimates soar 23% for the fourth quarter since October. Estimates for the first quarter of 2024 have also been going up rapidly. How important is Nvidia? Look at it this way. Fourth quarter earnings for the entire S & P 500 are expected to rise about 5% over the same period in 2022. About 2 percentage points of that are due to Nvidia alone. Earnings weightings, explained Most investors know that the S & P 500 is weighted by market capitalization: market capitalization of a company = shares outstanding x price. Calculating share-weighted earnings works differently. For share-weighted earnings, the earnings (or earnings estimates) for each company are multiplied by the shares outstanding. The stock price is not part of the equation. The result: “Companies that have higher dollar-level earnings (Apple for example) typically have more impact/weight on the earnings growth rates than companies with lower dollar-level earnings (CarMax for example),” according to John Butters from FactSet. What this means is that companies that are experiencing a rapid increase in their earnings can begin to exert an outsized influence on S & P 500 earnings. Nvidia is an earnings monster That’s the point about Nvidia, whose own earnings are due out on February 21. In a world where the S & P 500 is expected to see earnings growth of 10% this year, Nvidia’s earnings growth is off the charts. Quarterly earnings are expected at $4.53, according to FactSet, a gain of over 400% compared to the 88 cents reported in the same period a year ago. And Jensen Huang’s company has been racking up these huge earnings comparisons for several quarters. Compare that to Microsoft, which is expected to report $2.77 in quarterly earnings, a still-respectable 19% gain in earnings compared to the $2.32 reported in the same period in 2022, but nowhere near Nvidia. Do the earnings justify the price? While Nvidia’s earnings are up big, Nvidia’s stock price is also up big, about 200% in the last year. In this case, it means earnings are growing even faster than the stock price. Does this make Nvidia still attractive, even after a 200% increase in its price in a year? “On a relative basis, earnings [for Nvidia] are expected to grow significantly more than the market value has already moved,” Howard Silverblatt from S & P Global told me. “That is a good sign, but the rapid rise in price and earnings has upped the ante, implying much greater risk.”
