One chart shows why Big Tech earnings are critical for the health of the market rally - Yahoo Finance

The stock market is still all about tech.

New data from FactSet shows that while strategists have called for a broadening out of the market rally, big tech companies are expected to be the drivers of Q4 earnings growth in the S&P 500.

Earnings for Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) are expected to grow a combined 53.7% in the fourth quarter. The other 494 companies in the S&P 500 are expected to see a 10.5% decline.

Five of those companies —Apple, Alphabet, Microsoft, Amazon and Meta — are set to report quarterly results this week.

After the remaining Magnificent Seven tech stock, Tesla (TSLA), disappointed with its report, Evercore ISI managing director Julian Emmanuel described the stock price reaction to these reports as “critical for overall market direction.”

The expectations for some names are massive. Nvidia is expected to grow earnings per share by more than 400% compared to the same period a year prior. Analysts project Meta’s earnings per share to grow 175% from the same period a year prior.

The eye-popping growth for some of the largest stocks in the market is expected to continue next quarter, too. A second chart from FactSet shows that Amazon, Alphabet, Meta and Nvidia are expected to grow earnings by nearly 80% in the first quarter of 2024. The other 496 companies, including Apple Microsoft and Tesla, are expected to grow earnings by a combined 0.3%.

“Their earnings are incredible compared to the rest of the market,” JJ Kinahan, IG North America’s CEO told Yahoo Finance Live. “You don’t often see this where a few stocks are so outperforming the rest of the market.”

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To some on Wall Street, these massive earnings expectations help explain why the S&P 500 is hitting all-time highs and still might not be overvalued.

“There’s more growth in that [S&P 500] valuation now than there used to be,” Pettit said, nodding to the increased position of technology in the index.

During the market’s recent rally, nearly 90% of the growth seen in January has also been driven by the same tech companies excluding Tesla, per analysis from Yahoo Finance’s Jared Blikre. This comes after the seven tech companies were the major market driver in 2023, and it creates a simple reason for why investors will be watching these reports closely.

Still tech earnings expectations go beyond just the quarterly numbers. It’s about updates on various market-moving narratives during earnings calls, too.

Artificial intelligence has been at the center of earnings improvements for Meta and Nvidia. Microsoft and Amazon both have AI plays, too, but their cloud revenues are typically more closely scrutinized. Additionally, Apple’s products business can provide a lens into demand for hardware and the overall state of consumer spending.

All of this combines to make tech earnings crucial for the market — not only because people expect Big Tech to do well but because if their results miss estimates, the lagging parts of their business could be a flashing a warning sign about an economic slowdown.