Morgan Stanley: BigTech revenues outweigh market impact of Iran war

Strong corporate reporting in the U.S., due to the active growth of revenues of the technology sector, will offset investors' fears about the impact of war in the Middle East on the markets, according to strategists Morgan Stanley, the views of which Bloomberg cited. According to their assessment, the impact of the conflict will be limited and will affect individual companies rather than entire sectors, which allows the market to remain stable.

According to Morgan Stanley, over the past month analysts have raised earnings forecasts for companies in the S&P 500 index for several time horizons at once. Forecasts for the second quarter increased by 2%, for 2026 - by 3%, and for the next 12 months - by 4%.

Earnings for companies in the S&P 500 beat forecasts by an average of 6% in the first quarter, the best result in four years, said Morgan Stanley strategist Michael Wilson. At the same time, growth remains uneven. Seaport Research Partners estimates that the first-quarter earnings of the median company in the index grew about half as slowly as the index as a whole, MarketWatch wrote. This underscores that the profit growth of the largest companies has a disproportionate impact and may mask more heterogeneous dynamics in other market segments, the publication notes.

The major technology companies and semiconductor manufacturers, such as Alphabet, Amazon and Meta Platforms, made the main contribution to the growth of corporate profits. Their net income in the first quarter grew by 81%, 77% and 61%, respectively, with growth rates significantly outpacing revenue dynamics, MarketWatch notes.

"However, the strength is not limited to these segments": analysts are also actively revising upward forecasts in financials, industrials and cyclical consumer companies, pointing to more sustainable earnings growth, Michael Wilson noted.

As a result, the profitability of index companies remains high. According to FactSet data as of Ma. 1, taking into account already published and expected reports, the net margin of S&P 500 companies in the first quarter was 14.7%. If the figure holds, it would be the highest since tracking began in 2009. Profitability rose in seven sectors of the index, the publication reports.

EPS growth accelerated from 15% to 27.1% over the past week, according to a FactSet report cited by MarketWatch. If the rate holds through the end of the quarter, it would be the highest annualized growth rate since the post-pandemic recovery, when it reached 32% in the fourth quarter of 2021.

Despite the participation of the financials, industrials and utilities sectors, the current performance of corporate earnings masks weaker results in other segments and emphasizes the persistent performance gap within the index, MarketWatch notes.

The impact of the war with Iran is expected to be "uneven, not systemic": rising costs will affect companies individually, rather than putting pressure on entire sectors, Michael Wilson said. At the same time, energy companies, in turn, will support overall profits, as higher oil prices stimulate the growth of their revenues, the analyst said.

At the same time, investors are concerned about the high concentration of the market: about 80% of the yield of the S&P 500 since the beginning of the year provided only seven companies, notes Bloomberg.

Goldman Sachs strategists, led by Ben Snyder, note that the boom in investment in artificial intelligence infrastructure shows no signs of slowing down. Since the start of the reporting season, analysts have continued to raise spending estimates for the largest cloud providers.

"The increase in spending forecasts leads to a comparable increase in expectations for the results of AI infrastructure companies, which improves the overall market outlook and shifts the risks to our upside earnings per share estimates for the S&P 500," Ben Snyder and his colleagues wrote.

This article was AI-translated and verified by a human editor