Missed Tech Earnings Not All Bad For QQQ

Lower-than-expected earnings reports from Microsoft Corp. and Alphabet Inc. earlier this week may prove to be a blessing in disguise for one of the leading tech-focused ETFs. 

The market heard from several leading tech companies this week that make up a substantial percentage of the Invesco QQQ ETF (QQQ) that tracks the tech sector.  

The message for technology investors is that despite remaining head winds, the leading companies stand to outperform smaller competitors in a challenging environment, including rising interest rates and a strong U.S. dollar, that weigh on multinational companies.  

QQQ has a 10.28% exposure to Microsoft (MSFT), 7.01% exposure to Google’s Alphabet (GOOG) and 3.07% to Meta Platform (META) shares. QQQ is down 25.78% so far this year, even though it returned 15.39% over the past three years. 

Market sentiment turned positive despite earnings misses for Microsoft and Alphabet, telling us that these shares, the tech-heavy Nasdaq and QQQ may have found at least a temporary bottom, and the path of least resistance has turned higher.  

While Microsoft and Alphabet missed on earnings expectations on Tuesday, the news was not quite as bad as the market had feared.  

META, which reported its earnings on Wednesday, posted disappointing results, as ad revenues continue to weigh on the company’s performance. META shares did not follow MSFT and GOOG in its post-earnings performance, as the market’s overwhelming sentiment remains bearish. 

Earnings Misses 

On July 26, Microsoft missed consensus estimates on revenue and profits. The company reported a 4% deceleration from the prior quarter’s growth rate.  

Alphabet reported the second consecutive earnings decline. The two technology giants told markets their earnings were worse than forecasts, which is typically bearish for stock prices. However, the current economic landscape is anything but ordinary.  

Counterintuitive Rally In MSFT, GOOG 

On July 27, MSFT and GOOG shares moved higher in the wake of the Q2 earnings reports.  

MSFT shares have been trending lower since reaching a record $349.67 high on Nov. 22, 2021. The stock reached its most recent low of $241.51 on June 14. MSFT shares settled at $251.90 on July 26 before the earnings announcement.  

As the above chart highlights, the shares rallied after earnings, reaching $270.05 on July 27 and closing at the $268.74 level. GOOG shares followed a similar path.  

After rising to a record $152.10 on Feb. 2, 2022, GOOG shares declined to a low of $102.21 on May 24. The stock closed at $105.44 on July 26 and rallied in post-earning trading to a high of $114.40, settling at $113.60 on July 27.

The counterintuitive moves in MSFT and GOOG occurred as the companies’ earnings and guidance caused more aggressive buying than selling in the technology leaders.  

Blessing In Disguise 

The lower-than-expected results for Q2 likely lowered the bar for consensus expectations for future quarters. Moreover, optimistic guidance and no surprises from the Federal Reserve on Wednesday pushed MSFT and GOOG shares higher.  

Microsoft said that Azure, its cloud business, will grow by 43% in the current quarter, a positive development for the company. Meanwhile, Alphabet’s revenues were close to expectations across all critical business segments despite the macroeconomic backdrop of rising interest rates and a weakening outlook.  

The bottom line is that the technology giants with dominant market positions will fare far better than smaller competitors in the current environment, so the ETFs with significant exposure to these names stand to benefit as well.  

Charts source: Barchart