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US equities outperform as tech companies surge

04082020

US listed companies continued to stage a rebound during the month of July, recording an outperformance of six per cent relative to European listed equities. The S&P 500 Index, which represents the largest US companies, managed to lock in strong monthly returns, as 62 per cent of its constituents reported earnings results for one of the most challenging quarters in history.

This year’s second quarter earnings results mark a period of sales and earnings decline, as the world challenges through the COVID-19 pandemic. Even so, in comparison to market expectations, 81 per cent of S&P 500 companies which reported so far, managed to report better than expected earnings. In Europe, despite that aggregate quarterly revenue for listed companies on the Stoxx Europe 600 Index disappointed, earnings also surprised to the upside.

On a sector level, the plunge in oil price materially impacted the performance across the US energy sector which stands to be the hardest hit sector from the covid-19 pandemic. Revenue and profitability more than halved during this quarterly earnings season. Meanwhile, the technology, health care and financial sectors were the only sectors which managed to report overall sales growth during the pandemic.

Nevertheless, the US equity market index managed to record a positive performance across all sectors except energy, as aggregate earnings surprised to the upside. Despite that the strong performance across the US equity market was broad based, consumer discretionary stocks locked in the best sector returns. However, the US equity index was predominantly boosted by the continued strength in the share price of technology companies, given their significant contribution by market capitalisation.

Evidently, technology companies continued to reinforce their domination, with a strong earnings surprise for the second quarter. Last week’s tech heavy earnings week amounted to more than $28 billion in earnings across Alphabet, Amazon, Apple and Facebook.

Retail revenue boosted Amazon’s quarterly earnings, beating market consensus. The online retailer also managed to exceed the high end of its previous guidance, as strong demand and continued growth in its cloud business drove its profitability higher. Apple topped expectations amid stronger demand for work from home devices and growth in its app business while demand for iPhone SE boosted its iPhone revenues. Meanwhile, Facebook and Alphabet, both of which primarily depend on advertising revenue, reported an improving trend throughout the quarter as commercial interest recovered.

Together with Microsoft, the five companies now account for approximately 20 per cent of the S&P 500 Index, largely shaping the index returns for the month. In fact, the Nasdaq Composite, which represents the performance of the US technology companies, surged by 12 per cent during the last week of the month alone, as the tech giants beat market expectations.

Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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