Big Tech stocks underperform after a tough earnings season

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Josh Warner
By :  ,  Former Market Analyst

Big Tech stocks underperform

Big Tech stocks have underperformed compared to the wider market since their earnings season kicked-off on October 25, with Apple, Microsoft, Alphabet, Amazon and Meta all suffering significantly sharper declines compared to both the tech-heavy Nasdaq 100 and the S&P 500.

Big Tech stocks have underperformed since releasing their latest earnings


Big Tech earnings season recap

Why are they underperforming? Well, firstly there was little reason for investors to celebrate this earnings season.

The macro environment has become more unfavourable for corporate America. Topline growth was held back by the unrivalled strength of the US dollar, tough comparatives from when demand boomed last year, and signs that consumer spending is starting to feel the pressure. Rising interest rates and fears of a recession continue to cloud the outlook. In response, businesses have curtailed advertising budgets and reduced the pace of spending on infrastructure like cloud-computing. We have also seen sales of tech hardware and spending on ecommerce grind to a halt after exploding during the pandemic. Meanwhile, rampant inflation continues to push up costs, squeeze margins and hurt profitability.

The result was revenue growth stalling to its slowest pace in years and earnings coming under pressure, with only two members posting a rise at the bottom-line this quarter.

Big Tech saw revenue growth slow and earnings come under pressure

(Source: YoY growth in calendar Q3, Bloomberg)

Let’s have a quick look at the main takeaways for each stock.



Apple was the winner this earnings season and provided just enough good news to be the only member that avoided a sharp selloff. But iPhone sales were light compared to estimates, and it has since warned that fresh Covid-19 restrictions have impacted production in China, where over 90% of all its handsets are made. It has not provided specific figures, but reports suggest it could result in 3 million to 6 million fewer iPhones being shipped in the new financial year than originally planned. That means concerns have shifted back to the supply chain ahead of the golden quarter of sales over the holiday season and at a time when scrutiny over demand is also increasing, posing a threat to estimates for the new financial year.



Microsoft provides an array of vital services that will remain in demand, but many aspects of its business – like Azure, LinkedIn and Windows – are sensitive to the economic landscape and are likely to feel the pressure during this downturn, while demand for hardware like Surface laptops and Xbox gaming consoles has continued to stall. Revenue came in ahead of expectations but rose at its slowest rate in five years. The ongoing slowdown and a miss from its cloud computing arm spooked markets and sparked fears that enterprise spending is decelerating faster than markets anticipated.



Alphabet makes its money from advertising and even a monopoly over internet search couldn’t help the juggernaut shine in a challenging advertising market. Lower demand has translated to lower prices for ads, down around 5%, while YouTube posted a surprise drop in revenue. The cyclical nature of its business means it is not immune to the current environment and that saw quarterly revenue growth grind to the slowest pace on record in almost a decade when one pandemic-disrupted period in 2020 is stripped out. Google Cloud helped provide some momentum to the topline but remains a drag on the bottom while Amazon and Microsoft continue to make most of their money from their larger cloud computing operations.



Meta was the loser yet gain this earnings season. Social media stocks have grappled with the same slowdown seen by the likes of Alphabet, but face a myriad of other headwinds with Meta suffering from increased competition from the likes of TikTok, less effective ads after Apple stopped firms tracking user’s online behaviour, and a shift to lower-margin products. That meant ad pricing fell 18%, demonstrating that social media companies are having a much tougher time than other ad-reliant businesses like Alphabet. With its core business suffering its most challenging period on record, pressure is mounting for it to pull back on spending on its metaverse ambitions. CEO Mark Zuckerberg has called for patience from investors, but this has already been tested.



Amazon continues to stand out as the focus is more on growth rather than profits, but that is not doing it any favours as sales growth is now stalling and profits are succumbing to the inflationary environment. Ecommerce is likely to remain challenging, and Amazon has said sales growth in the final three months will be the slowest on record for any holiday shopping season on record. Still, Amazon should continue to solidify its position in the market as smaller rivals will have a tougher time surviving. Amazon Web Services, which makes the money that funds its less lucrative and earlier-stage ventures, also missed expectations and that, twinned with the miss from Microsoft, suggests the entire market is cooling down.


Big Tech outlook looks bleak in the short term

It wasn’t just the results that has weighed on Big Tech stocks but the disappointing outlook that accompanied them, which suggests things will get worse before they get better and points toward more pain in the short-term.

Alphabet said it was taking drastic actions in response to the deterioration in the economic landscape as it prepares for a prolonged period of challenging conditions and Microsoft has warned revenue growth will slow even further in the current quarter to show the foot has only just started to come down on the brakes. Amazon is set for its worst festive quarter on record. Meta earnings will remain under pressure throughout 2023, and Apple is now threatened by Covid-19 problems in China.

Prospects are therefore bleak for now, with estimates for 2023 firmly leaning toward the downside. Big Tech went on a hiring spree as growth accelerated in the wake of the pandemic, but they are all now either hiring new staff at a reduced rate or have initiated a complete freeze on recruitment, suggesting they are bracing for these more troublesome times to persist.

Big Tech has pressed pause on recruitment after going on a hiring spree during the pandemic

Meta has announced it is laying off 11,000 workers, representing about 13% of its workforce, as it tries to become leaner. Apple is reported to also have imposed a hiring freeze on every department outside of R&D, potentially until the end of September. Amazon has stopped taking on any more staff in its corporate offices and is reviewing how to cut spending across the board, with all its unprofitable ventures being evaluated. Alphabet said it would cut the rate of hiring by half in the current quarter and said this will slow even further in 2023 as it looks to ‘realign resources’. Microsoft has also been rejigging its workforce and has said it is aiming to improve employee productivity.

The ability to keep a grip on costs and protect profitability will be vital going forward and the workforce, which is one of the biggest expenses of any organisation, are being closely-watched. All five players have seen costs rise at a much faster pace than sales in 2022 and this trend is expected to continue in 2023.


Big Tech: Is the era of stellar growth over?

Big Tech outperformed as the economy bounced back from the pandemic and this saw their earnings explode in 2021. However, we saw bottom-line growth peak in the second quarter of last year and, having declined since then, we are now starting to see profits flatline or fall. For now, the era of reliable double-digit growth that investors have become accustomed to is over.

Wall Street believes profits will remain under pressure over the coming quarters but that the third and fourth quarters of 2022 could be the trough, having pencilled-in milder declines in early 2023 before eyeing a return to growth in the second and third quarters. Notably, this is when markets currently believe interest rates could start to peak and some relief could feed through to equity markets, as well as when Big Tech will start coming up against weaker comparatives that will help flatter their bottom lines.

Big Tech earnings are forecast to remain under pressure as we enter 2023

(Source: Figures and estimates from Bloomberg)


Why are Big Tech stocks underperforming?

Another reason Big Tech is now underperforming the wider market in addition to the disappointing earnings season is that their dominance means they experience outsized moves in the market. For example, the Nasdaq 100 and S&P 500 both rallied over 26% in 2021 but we saw Microsoft jump 51% while Alphabet soared 65%. Their valuations became far more bloated during the good times and therefore have further to deflate now that times are tougher.

This is demonstrated by the fact Apple and Microsoft still demand a premium compared to the wider market despite the sharp selloff this year. Alphabet currently has a cheaper price-to-earnings ratio than the broader tech space and the S&P 500, while Meta’s valuation has plummeted after emerging as the big loser this season.

Big Tech valuations have dropped to more sensible levels compared to during the pandemic

(Source: Bloomberg)


When will Big Tech stocks hit the bottom?

The fundamentals suggest we are not yet at the bottom despite the collapse in valuations we have seen in 2022. Most of the headwinds facing Big Tech spawns from the macro environment, so we need to see an improvement here before the bulls return.

News this week that CPI inflation eased more than expected in October has provided hopes that the Federal Reserve will start raising interest rates at a less aggressive pace going forward and has provided some optimism in the markets. However, inflation still remains well above the Fed's 2% target and interest rates are set to continue rising and therefore the risk of recession is still alive. Fed chair Jerome Powell has warned interest rates could peak higher than previously anticipated but over a longer period of time as the central bank now waits to see the impact of its rate increases before hiking them again. 

Ultimately, we need inflation to continue easing but markets hope the Fed will make a firm pivot toward looser monetary policy at its next meeting in December. In an ideal world, that would happen without a harsh recession and with an improving economic outlook, which will decide how Big Tech fares in 2023.  


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