The Underpinnings For Facebook Weaken Over Time: David Garrity on Bloomberg

To listen to replay, click here.

With Room To Raise 3Q18 Estimates, Look For Tech Sector To Continue To Provide Market Leadership

As 2Q18 earnings season has kicked off, it is useful to quickly assess the attainability of current Street estimates in an effort to see whether analyst estimates will increase following the release of results. Currently, Street estimates for the S&P500 2Q18 results call for +20% year/year earnings growth (which will end up around +23% if companies beat by usual margin, but will be below 1Q18’s +24.8%) off +8.7% revenue growth (a record going back to 3Q11). The sectors expected to show above average growth are: 1) Energy (+143%), Materials (+49%), Telecom (+27%) and Technology (+25%). Expected 3Q18 S&P500 earnings growth now stands at +21.7% on +7.6% revenue growth. Against this backdrop, consensus Technology 3Q18 estimates call for a +15.4% EPS growth, well below the 2Q18 +25% expectation. To the extent Tech can put up better than forecast 2Q18 results, the Street has ample room to raise 3Q18 estimates and so support continued Tech sector stock leadership going into 2H18.

2Q18 Results From GOOGL, MSFT Support Prospect Of 2H18 Stockmarket Leadership

Within Tech, note that MSFT and GOOGL both posted better than expected 2Q18 results. While AMZN’s AWS cloud service (~$6.5bn annual revenue run rate, growing ~+45% yr/yr) is 3x greater than MSFT’s Azure cloud computing platform, MSFT is posting stronger growth (~+85% yr/yr) which implies market share gains in a critical growth market and possibly sets the stage for MSFT to match AMZN AWS in size within the next 3 years. GOOGL continues to power the growth in internet advertising, despite the impact of GDPR going into effect in late May 2018 and the recent EU fine. Our expectation is the effect of GDPR will only be felt over time as it may represent a constant headwind for internet advertisers and social media companies (e.g. FB, TWTR) to overcome. Meanwhile, with the 2018 midterms elections and a relatively robust global economy, we look for Tech sector financial prospects to remain strong in 2H18.