It was a prospect that seemed all but unimaginable just a few weeks ago. Amid what is shaping to be the greatest downturn since the Great Depression, the US market has staged an unlikely rally, with the S&P 500 up 30% from its recent low.
We believe this is due in no small part to the heavy lifting of the market’s tech giants, which are the same band of stocks that underpinned a multi-year bull run. Look no further than the NASDAQ, which overnight was still within an inch of where it finished 2019. You’d be mistaken for thinking there wasn’t an economic crisis on our hands.
Yet it is the resilience of the US tech sector, where the five largest companies make up 20% of the entire S&P 500, that we believe can be attributed to the marked ‘distortion’ between the state of the broader economy and the recent performance of the stock market.
There is one thing the tech sector has on its side in the current climate – each of the key stocks are leveraged to an online world that we are now even more dependent on.
Apple rounds out the tech heavyweights
We expected Apple (NASDAQ: APPL) to be hit hardest of any tech major heading into results, with the global pandemic weighing on its manufacturing supply chain and dampening consumer demand.
As the Coronavirus escalated in China, Apple cut its prior guidance. In recent days, it also announced production delays for its flagship iPhones set later this year.
We consider these points are reflected in the company’s results, where iPhone revenue dropped 7% year-on-year to US$28.96 billion.
However, services revenue is playing an ever-increasing role, jumping 16% to US$13.34 billion. This includes sales from Apple Music, iCloud, Apple+ and the like. This was complemented by Wearables, Home and Accessories, where sales grew 22.5% to US$6.28 billion. We believe both are providing somewhat ‘defensive’ sources of revenue as consumers stay at home.
At a group level, earnings were US$2.55 per share, while revenue totalled US$58.3 billion. Both of these metrics were higher than the market’s expectations for EPS of US$2.26 and revenue of US$54.54 billion.
While opting not to issue a third-quarter guidance, Apple CEO Tim Cook left some room for optimism, stating that the steep drop in February “began to recover some in March, and we’ve seen further recovery in April”. We believe an increase in the company’s buyback program and dividend also align with the company’s expectation for a rebound.
Broad-based tech revenue remains resilient
We considered that Amazon (NASDAQ: AMZN) would be one of the biggest beneficiaries of a transition to the digital economy. Largely, that showed up through above-forecast revenue of US$75.45 billion, and its Amazon Web Services division surpassing US$10 billion in revenue for the first time.
However, earnings were below forecast at US$5.01 per share, with the entirety of its US$4 billion operating profit set to be allocated to Coronavirus expenses like employee virus testing. We consider the defensiveness of the