Tim Hoyle, Chief Investment Officer
Thoyle@haverfordquality.com

Earnings Results Justify Lofty Multiples for Top Tech Companies

As of October 31st, 64% of S&P 500 companies, representing the vast majority of the market capitalization of the index, have reported earnings. Of those companies, 80% surprised on earnings growth while 79% outperformed revenue expectations. Overall, 3rd quarter earnings growth is tracking at 10.7%, marking the 4th straight quarter of double-digit, year-over-year growth. ¹2025 earnings are projected to grow 11.5% with 2026 growth close to 14%.  If earnings are realized, it will mark 3 straight years of double-digit growth, a winning streak not seen since the early 2000's. 

¹Factset Earnings Insights

Last week's earnings reports from many of the largest U.S. tech companies highlighted the demand for AI-related services, reinforced their dominant position in the market, and validate their premium valuations. Microsoft delivered strong results with revenue growth driven by its cloud and AI segments, while Apple beat expectations on strong services revenue with iPhone revenue increasing double digits. Meta posted impressive advertising revenue growth and highlighted its expanding AI capabilities and Google parent Alphabet announced their Cloud Platform (GCP) is thriving due to growing demand for cloud products and services. 

These large U.S. tech companies and others affiliated with the roll out of AI infrastructure and services, trade at relatively high price-to-earnings ratios. Microsoft, Apple, Nvidia, and Amazon all trade around 32x expected 2026 earnings, while Alphabet trades at 26x. Meta trades cheapest of the group, priced at only 21x earnings, based on investors' concerns that the company's spending spree will not yield a suitable return on investment. While these valuations are elevated relative to historical averages, they are a reflection of the corporations' quality, scale, innovation, and leadership. We believe their consistent earnings growth, strong balance sheets, and strategic positioning in transformative technologies justifies their premium valuations.  Of the Mag 7, only Tesla trades at a cult-like valuation of 212x earnings.