Big Tech earnings have been strong, but Apple is about to answer the thousand-dollar question

While the stock market reactions may not prove it, Big Tech is four-for-four so far this earnings reporting season.

Alphabet Inc.
GOOG,
-0.03%

GOOGL,
-0.09%
,
Amazon.com Inc.
AMZN,
+6.83%
,
Meta Platforms Inc.
META,
+2.91%

and Microsoft Corp.
MSFT,
+0.59%

all beat earnings and revenue expectations for the latest quarter, showing, among other things that the advertising market was healthy in the latest quarter and that software spending is holding up.

But one more major test looms in the week ahead. Apple Inc.
AAPL,
+0.80%

is due to deliver September-quarter results on Thursday and those earnings will answer a key question: Are consumers still so willing to purchase thousand-dollar iPhones in the current economy?

Results from other companies in recent weeks have painted a mixed picture of consumer spending. Visa Inc.
V,
-0.87%
,
Mastercard Inc.
MA,
-0.14%

and American Express Co.
AXP,
-1.42%

say that spending remains resilient, but there are also signs that cracks are starting to form in categories deemed non-essential. Just look at Align Technology Inc.
ALGN,
+0.20%
,
the maker of Invisalign orthodontic aligners, which saw its stock plunge last week after noting that people seem to be putting off dental and orthodontic visits.

Read: Invisalign maker’s stock craters after soft earnings, but analysts still say it’s a buy

Granted, some might say that iPhones are glorified necessities these days for Apple fans, even with their high price tags. But Apple conducted an effective price increase on its iPhone 15 Pro model when it rolled out its new phones in September, all while delivering a mostly incremental suite of feature upgrades across all its latest models. Will the new phones prove enticing enough in a period of stretched budgets?

Just judging by S&P 500
SPX
results so far in the aggregate, the odds would seem to be in Apple’s favor for a beat this quarter. About half of index components have already reported, and 78% have posted earnings upside, while 62% have surprised positively on the top line, according to FactSet.

Revenue will be the key item for Apple, as consensus expectations call for a small decline on the metric, which would mark the fourth consecutive year-over-year drop. It’s also worth noting that companies on the whole haven’t been topping revenue estimates by their usual margin. S&P 500 components in aggregate have reported revenue 0.8% above expectations, which compares with a five-year average of 2.0%, FactSet Senior Earnings Analyst John Butters wrote in a recent report.

Apple’s report could also highlight the impact of currency on corporate results, as the company generates more than half of its revenue internationally.

“Given the stronger U.S. dollar in recent months, are S&P 500 companies with more international revenue exposure reporting lower (year-over-year) earnings and revenues for Q3 compared to S&P 500 companies with more domestic revenue exposure?” Butters asked. “The answer is yes.”

This week in earnings

Many U.S. investors in financial-technology companies likely hadn’t heard of European payments player Worldline SA
WLN,
+9.06%

before last week, but a warning from the French company about deteriorating conditions in Europe helped send shares of PayPal Holdings Inc.
PYPL,
-2.63%

and Block Inc.
SQ,
-3.98%

sharply lower Wednesday, in a selloff one analyst deemed an overreaction. Those companies will look to reassure Wall Street about the health of their businesses with their own reports this week. Plus, while not a payments name, SoFi Technologies Inc.
SOFI,
-0.43%

will provide another read on the fintech sector. Investors will be watching to see how the end of the student-loan moratorium impacted student lending volumes.

The week ahead will also shed light on how consumers’ dining preferences have evolved in the current economy. Starbucks Corp.
SBUX,
-0.70%
,
Dine Brands Global Inc.
DIN,
-0.12%
,
Cheesecake Factory Inc.
CAKE,
-0.47%

and Sweetgreen Inc.
SG,
+0.59%

are among names on the docket. Plus, amid concerns about the impact of GLP-1 drugs such as Ozempic and Wegovy on eating habits, Kraft Heinz Co.’s management will be in the spotlight.

Don’t miss: What exactly are patients taking new weight-loss drugs eating and what are they avoiding? Bernstein asked them.

The call to put on your calendar

You can’t spell Advanced Micro Devices without AI (sort of): Nvidia Corp.
NVDA,
+0.43%

has been ruling the chip world this year thanks to its dominance with the sort of hardware needed to power the corporate AI fervor. Investors will be watching Tuesday afternoon to see how quickly Advanced Micro Devices Inc.’s
AMD,
+2.95%

own AI story is coming together. “The AMD narrative feels all about their data center (and, particularly, their AI story) right now,” Bernstein analyst Stacy Rasgon wrote in a note to clients. “In the near term the achievability of their 2H data-center growth (guided to 50% half-over-half) will be the question.” Rasgon expects AMD to discuss recent customer wins for its MI300X chip, though he thinks it will take time for the company to see “real volume.”

The number to watch

PayPal transaction margins: Shares of the one-time investor darling are trading at their lowest levels since May 2017, and the latest source of anguish for Wall Street is the company’s transaction margins. PayPal’s lower-margin unbranded checkout business has been growing more quickly than its higher-margin branded checkout product, a trend that’s been weighing on overall transaction margins. Barclays analyst Ramsey El-Assal expects the third quarter to mark a bottom on the metric before trends stabilize in the fourth quarter. “We do not believe the stock is crowded on the long or short side into earnings, as investors lack conviction regarding the magnitude of transaction margin headwinds in Q3,” he wrote in a recent preview. “In any case, we view Q3 as a potential clearing event.” PayPal posts results Wednesday afternoon.

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