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This week is the busiest during the US earnings season with 428 companies reporting earnings.

The earnings season has against expectations been a bit better than expected and were likely a net positive contributor to equity returns last week.

However, growth rates on both the top and bottom line are coming down and Q3 earnings could likely be the quarter where global profit growth goes negative.

Investors have been quite sanguine despite the picture of low growth and high economic uncertainty, and S&P 500 is close to all-time highs.

S&P 500 Chart

S&P Chart. Source: Saxo Bank

This week the two most important earnings releases are from Microsoft (Wed) and Amazon (Thu) as those two companies are 7.2% of the S&P 500 weight.

Microsoft’s performance in its latest fiscal quarter will undoubtedly meet expectations as the software maker is still enjoying an upgrade cycle related to Windows 10, conversion of on-premise Office users to the Office 365 cloud solution, and momentum in its cloud infrastructure business.

Amazon share price down from its peak

The Amazon share price is down 14% from its peak and have not reached a new all-time high since Q3 2018 which is unusual for the e-commerce giant.

It reflects increasing hesitation to continue to pay a 100% valuation premium to the overall equity market as its size has swelled to an enterprise value of $900bn and revenue of $252bn.

Investors will focus on AWS as this $30bn business is the most profitable for Amazon but also a business with increasing competition from Google, Microsoft and other cloud companies which could negative impact the AWS’s healthy 60% operating margin.

Margin pressure has also been a topic in its e-commerce operations both in the North America and International segment, but more worrisome for the International segment is that operating income is negative while growth is slowing down.

On the positive side AWS will most likely deliver strong growth and the advertising unit may surprise to the upside.

For S&P 500 to set a record, the Amazon share price needs to deliver.

Amazon share price chart - 22 October 2019

Amazon share price chart. Source Saxo Bank

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Michael Morton

Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

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