The US stock earnings season kicks off this week, can the "technology faith" be renewed?

The outstanding stock price performance of US tech giants this year has raised Wall Street's expectations. Can they prove themselves in the new round of earnings season?

The new round of earnings season for US stocks will kick off this week, with financial stocks including Morgan Stanley and Citigroup leading the way in releasing their performance reports this Friday, while Microsoft, Alphabet, and Tesla are scheduled to report earnings on July 23.

Wall Street's expectations for US stock earnings this time are quite high. According to FactSet's data forecast, earnings for the S&P 500 index in the second quarter are expected to increase by nearly 9% year-on-year, potentially achieving the largest quarterly growth since early 2022.

Furthermore, analysts usually lower their earnings forecasts for companies as the earnings season approaches. However, the earnings downgrade for this earnings season is not significant.

FactSet data shows that earnings forecasts for this quarter have only been lowered by 0.5%, compared to an average downgrade of 3.4% over the past five years.

This also means that major US companies, especially tech giants, must achieve higher earnings growth to avoid disappointing optimistic Wall Street analysts and lay a solid foundation for the stock market to reach new highs.

Tech giants drive the rise of the S&P 500, but their earnings contribution is slightly insufficient

Since 2024, the S&P 500 index has risen by about 17%, mainly driven by a few tech giants: NVIDIA's stock price has doubled this year, with a market value exceeding $3 trillion. Amazon, Meta, Microsoft, and Apple's stock prices have also surged, rising by 32%, 53%, 24%, and 18% respectively this year. Investors' valuations of tech giants have also been soaring, with the overall average P/E ratio of NVIDIA, Apple, Microsoft, Amazon, and Meta rapidly increasing from 28 times to 34 times.

Data from Apollo Global Management shows that the top ten companies in the S&P 500 index account for 37% of the index's market value, but only contribute 24% of the earnings.

This means that the earnings reports for the new financial quarter need to prove that their high valuations are justified. If their earnings fail to meet expectations, it could disappoint Wall Street.

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, said, "We need earnings to catch up with valuations, but it's clear that the earnings bar has been set quite high."

Victoria Bills, Chief Investment Strategist at Banrion Capital Management, stated that if these companies' earnings fail to exceed expectations, stock prices could experience a pullback.

Jim Smigiel, Chief Investment Officer at SEI, said, "The current situation is very unusual. We have outstanding tech companies and industries with huge potential, but even for them, are the expectations set too high?"

Deutsche Bank: Earnings growth for tech giants in this round may slow down

According to Deutsche Bank's forecast, the average earnings growth for tech giants in the new round of earnings is expected to decrease from 38% in the previous quarter to 30%. Meanwhile, the earnings recovery of other US companies will support further market gainsDeutsche Bank's Chief US and Global Strategist Binky Chadha predicts that the stronger profit performance of energy and materials companies will offset the slowing profit growth of tech giants, but he believes that the potential for a summer market rebound is limited.

However, some analysts believe that tech giants in the current US stock market are too important, and even if the profit performance of leading companies in other industries exceeds expectations, it may not be enough to offset the daily fluctuations of tech giants on the market.

Steven Sosnick, Chief Market Strategist at Interactive Brokers, said, "Our pricing may not be perfect, but it's very good. Currently, market sentiment is dominating everything, and I'm not sure if the good earnings of companies like Pfizer, Johnson & Johnson, or Walmart can offset the poor performance of Nvidia and Microsoft stocks in a single day."

Goldman Sachs research has found that historically, when high-valuation growth stocks fall short of earnings expectations, their stock performance typically lags the broader market by 32%, while low-valuation stocks typically lag the market by around 16% when earnings fall short of expectations.

Goldman Sachs expects that the valuation of US stocks will remain roughly unchanged in the future, and profit growth will drive the S&P 500 index to a new high of 5600 points by the end of the year