Apr 30, 2020 - Economy

Microsoft's strong earnings give stock market bulls more ammo

Illustration of the Microsoft logo

Illustration: Aïda Amer/Axios

Microsoft delivered the goods in its earnings report Wednesday, announcing increased profit and sales that not only beat analysts' expectations but showed the company could continue its impressive growth trajectory in the face of the coronavirus pandemic.

Why it matters: The impact of Microsoft's strong earnings is magnified by the fact that it is one of the five Big Tech companies that account for around 20% of the entire S&P 500's market cap — along with Apple, Amazon, Alphabet and Facebook — the index's highest level of concentration since the 2000 tech bubble.

  • With Microsoft's solid fundamentals and a mountain of fiscal and monetary money from the Fed and Congress, traders have more cover to keep looking past the economy's escalating deterioration.

What they're saying: “In the third quarter of fiscal year 2020, COVID-19 had minimal net impact on the total company revenue,” Microsoft said in its earnings release.

Between the lines: Stock traders have largely ignored poor earnings reports this year, preferring to look to a company's likely rebound once national quarantine orders are rescinded, and are expecting tech companies to weather the storm.

  • While most stocks have benefited from investors' forgiving approach, Microsoft joined Netflix as one of the companies that actually grew stronger during the early onset of the pandemic, which had led to a 4.8% contraction in U.S. first quarter GDP.
  • Microsoft shares rose more than 2% in after-hours trading and have gained around 12.5% so far this year, while the S&P 500 has fallen just over 11%.

On the other side: Earnings season has not been nearly as kind to the rest of the market. First quarter earnings are on pace to fall by 15.8%, a number that has decreased each week of earnings season and would mark the largest year-over-year decline for the S&P since the second quarter of 2009, according to FactSet.

  • Analysts are expecting year-over-year earnings declines in the second quarter (-31.9%), third quarter (-16.9%) and fourth quarter (-7.4%) this year.

Be smart: The combination of crumbling earnings and rising investor optimism already has brought the broader market's overall valuations to historically high levels, with FactSet clocking the S&P's 12-month forward price to earnings ratio at 19.1 and the Nasdaq's at 27.1.

The bottom line: Most companies are struggling to tread water, but Microsoft's earnings and the respectable showings from Facebook and Alphabet this week could provide a shot in the arm to an already bullish market racing back from its March 23 nadir.

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