Step Aside, Banks. Tesla and Netflix Earnings Are the Real Tests.

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Forget banks—third-quarter earnings season doesn’t start until Wednesday, when
Netflix
and
Tesla
report.

Since
Alcoa’s
(ticker: AA) abdication, the kickoff of earnings season has been assigned to the U.S.’s big banks, including
JPMorgan Chase
(JPM) and
Citigroup
(C), which reported earnings on Friday. This despite the fact that some large, prominent companies, including
PepsiCo
(PEP) and
Delta Air Lines
(DAL), disclosed their results earlier in the week.

Don’t expect the overall market to care too much about how the banks do. The
S&P 500
financials sector, which includes banks and insurers but also
Visa
(V) and
Mastercard
(MA), totals 12.7% of the index’s market value. Its earnings contribution is expected to be larger, at 17.4% of third-quarter earnings, according to data from Refinitiv. But these days, the banks are less a reflection of the U.S. economy than they are of monetary and regulatory policy, which take up a good portion of their earnings calls.

No, earnings season doesn’t really get started until Wednesday, when the first of the large technology-oriented stocks that have driven the S&P 500 this year are set to report. That would be Tesla (TSLA) and Netflix (NFLX), followed by
Alphabet
(GOOGL),
Microsoft
(MSFT),
Meta Platforms
(META),
Amazon.com
(AMZN) next week, and then
Apple
(AAPL) on Nov. 2.
Nvidia’s
(NVDA) fiscal third quarter doesn’t end until Oct. 31, and it will report in late November.

The Magnificent Eight punch well above their fundamental weight, thanks to premium valuation multiples. The group makes up roughly 30% of the S&P 500’s market capitalization but is expected to contribute just 10% of the index’s third-quarter sales and 16% of earnings, according to Refinitiv. Hits and misses from their results will prompt outsize moves in the index.

Take Meta, which Wall Street analysts expect to report $8.0 billion in earnings for the third quarter, up 120% from the same period last year. That’s nearly a full percentage-point contribution to the S&P 500’s overall expected earnings growth in the quarter.

Nvidia is responsible for another 1.5 percentage point of expected growth, Amazon for 0.6 point, and Alphabet and Microsoft for 0.5 point each. With growth rates like those, how well the biggest companies on the market do could meaningfully swing overall S&P 500’s earnings growth one way or another.

There’s a slim margin for error: Analysts are predicting 1.3% year-over-year earnings growth from the S&P 500 in the third quarter, per Refinitiv. The biggest expected individual detractors from the index’s year-over-year earnings growth are
Exxon Mobil
(XOM)—a 1.9-percentage-point drag—and
Pfizer
(PFE), a 1.5-point drag.

That’s before considering the potential impact to investor sentiment from Big Tech’s results. In a year dominated by macro themes, the enthusiasm around artificial intelligence has been one of the greatest bullish drivers of the stock market. Nvidia’s results are showing the benefit already, while other companies are more likely to be merely talking up the technology’s transformative potential.

Hype can only go so far—eventually even Microsoft, Meta, and Alphabet will need to show that their AI investments are yielding a positive return. The third quarter of 2023 is still early innings in the AI revolution, but signs of progress will be cheered by investors, and may be necessary to justify many of the Magnificent Eight’s huge rallies this year.

Third-quarter earnings season may have officially kicked off, but the real action has yet to begin.

Write to Nicholas Jasinski at [email protected]

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