S&P 500: 9 Stocks To Pull In 25% Of Profit – Investor's Business Daily

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Just a few stocks dominate the S&P 500’s value. But did you know a handful are also expected to pull in a quarter of the index’s third-quarter profit, too?

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Nine mega-profit machines in the S&P 500, including technology kings Apple (AAPL) and Microsoft (MSFT), plus communications titan Facebook (FB), are all expected to make $3.9 billion or more apiece in just the third quarter, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.

Profits Concentrated In Few S&P 500 Companies

That’s astounding as it means so much of the S&P 500’s fundamentals are in the hands of a small number of companies.

Massive profits from these largely technology companies are important. They somewhat justify the high premiums and attention investors paid to them all year. The Technology Select Sector SPDR ETF (XLK) is down 7.1% since the end of August. Some worry tech stocks are ahead of fundamentals. Tech stocks, though, are still up 25.3% this year, far outpacing the S&P 500’s 3.7% rise.

And yet, of the nine S&P 500 companies seen making the most profit in the third quarter, three hail from the tech sector. Another three are in the tech-related communications services sector. Strong profit comes for what’s typically a good month for Apple and Microsoft stock.

“Investors continue to worry … the tech sector … created valuations tough to justify,” said Dan Ives, analyst at Wedbush Securities. “We believe transformational fundamental growth drivers across the tech sector … make us bullish heading into year-end.”

Tech Profits: A Sight For Battered Investors

Investors are bracing for a difficult reporting season for third-quarter S&P 500 profit. And technology and communications stocks will be looking for a much-needed glimmer of hope.

Analysts are calling for S&P 500 profit to drop 21% in the third quarter reporting season, says John Butters, earnings analysts at FactSet. The reporting season will start to pick up in coming weeks.

Profit for all 11 S&P 500 sectors is seen dropping from the third quarter of 2019. That’s not surprising. Many areas of the economy are still shut down due to the pandemic. Profit in the information technology sector is only expected to drop by 2.7% though, FactSet says. That’s actually a slight improvement from the 5% drop analysts expected for the quarter in June.

Apple And Microsoft Break Past $11 Billion Profit Barrier

If two S&P 500 companies appear to have a license to print money, it’s Apple and Microsoft.

Apple is seen making $12.2 billion just in the third quarter alone. That works out to an adjusted 70 cents a share profit. It’s important to note, though, if analysts are right Apple’s third-quarter profit will actually be nearly 8% lower than in the same period in 2019.

Why is the stock up 59%, then? Investors and analysts are looking ahead to fiscal 2021, when Apple’s profit is projected to jump nearly 17%. Do you know what matters most when looking to buy Apple stock?

And then there’s S&P 500 component Microsoft. The company is on pace to make $11.8 billion in the third quarter. And unlike Apple, Microsoft is seen growing. Microsoft’s per-share adjusted profit is seen hitting $1.54 a share, up nearly 12% from the same period in 2019. Shares of the tech giant are up nearly 35% this year. Here’s what to pay attention to when looking at Microsoft stock.

Sleeper Profit From S&P 500 Communications Firms

The communications services sector is suffering with the rest of the S&P 500 in the third quarter. Weak advertising has hurt many firms in the sector. FactSet says profit in the communications services sector is expected to drop 20.5% in the third quarter.

And yet, the profits of giants in the S&P 500 communications sector are holding up. Alphabet (GOOGL), the parent of Google, is seen making $7.6 billion in the quarter. That’s $11.03 a share, which is up 1% from the third quarter of 2019. If true, that would make Alphabet the fourth most profitable S&P 500 company in the quarter. It would be ahead of JPMorgan Chase (JPM).

Meanwhile, analysts think Facebook will make $5.4 billion in the third quarter, or $1.90 a share. That’s down nearly 11% from the third-quarter of 2019, but still enough to make Facebook the sixth most profitable S&P 500 company.

Given how much is riding on just a few S&P 500 companies, their profits had better deliver.

Analysts: Most Profitable S&P 500 Companies In Q3 2020

Company Symbol Expected Q3 2020 Profit ($ Millions)* Stock YTD % Ch. Sector % of Total S&P 500 Profit Composite Rating
Apple AAPL $12,214.6 59.1% Information Technology 5.0% 91
Microsoft MSFT 11,764.4 34.7% Information Technology 4.8% 95
Alphabet GOOGL 7,628.9 11.1% Communication Services 3.1% 82
JPMorgan Chase JPM 6,136.0 -30.4% Financials 2.5% 34
Berkshire Hathaway BRKA 5,524 -6.2% Financials 2.3% 73
Facebook FB 5,470.0 29.9% Communication Services 2.2% 97
Verizon Communications VZ 5,090.9 -3.2% Communication Services 2.1% 72
Intel INTC 4,426.1 -12.7% Information Technology 1.8% 80
Bank of America BAC 3,910.8 -31.6% Financials 1.6% 40
Source: IBD, S&P Global Market Intelligence, * – based on calendar third-quarter results using GAAP accounting

Follow Matt Krantz on Twitter @mattkrantz

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