Valuentum Exclusive Analysis for the Discerning Investor

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By Brian Nelson, CFA

Shortly after Trump's Liberation Day, where the President unveiled lofty tariffs on numerous countries, we released our wait-and-see outlook for the equity markets, which thus far has proven to be the right move, with the markets largely recovering from the depths reached in April. The S&P 500 (SPY), for example, is down just 3.3% year-to-date, excluding dividends.

A lot has happened since Liberation Day, including easing of tariffs to a 10% baseline for most, if not all, countries, with the key exception of China, where tariffs remain extremely elevated and prohibitive. Many countries are now reportedly negotiating trade agreements with the White House, and we expect China to be added to that list soon, even if a full US/China trade agreement won't be completed in the near term, as full-scale trade deals take time to mold.

Thus far, we have been impressed by earnings this season, particularly by the Magnificent 7. Perhaps the strongest report came from Microsoft (MSFT), where quarterly revenue increased 15% in constant currency, and the company leveraged that growth rate into 19% constant-currency diluted earnings per share growth. Azure and other cloud services experienced revenue growth of 35% in constant currency in the quarter, beating the consensus forecast. Microsoft's balance sheet and free cash flow generation remain top notch, and the company remains one of our favorite ideas, both for capital appreciation and dividend growth.

Apple's (AAPL) quarterly report wasn't bad either, where its earnings per share and Services revenue set record highs. This is far from news that comes during a recession, as the market may have started to worry about. In fact, we think this market will power through any minor weakness in GDP, and we continue to expect the areas of big cap tech and large cap growth to lead the charge higher. Apple's quarterly report showed the behemoth growing revenue 5%, quarterly diluted earnings per share 8% and its dividend 4%. It guided June quarter revenue to grow low to mid-single-digits year over year, too. Though China revenue faced pressure in the quarter and the company expects tariff-related costs to impact results, its outlook was much better than feared, in our view.

Meta Platforms (META), which we include in the Dividend Growth Newsletter portfolio, also put up some nice quarterly growth rates. Revenue increased 16% in the quarter, income from operations advanced 27%, while diluted earnings per share increased a whopping 37% from last year's quarter. Though these numbers are backward looking, we see no signs of recessionary conditions in Meta's results either, and the company continues to plow more capital into investments in artificial intelligence. Meta is not a large dividend payer, but we think it has the potential to become one of the best dividend growers on the market in coming years.

Microsoft's revenue up 15% in constant currency, Apple's revenue up 5%, Meta's revenue up 16%--all in the calendar first quarter--but the strength doesn't stop there. Consolidated Alphabet (GOOG) revenues increased 14% in constant currency, while Google Cloud revenues jumped 28% in the quarter. Total operating income at Alphabet swelled 20% higher, while GAAP earnings per share increased a whopping 49% in the quarter. Alphabet also raised its dividend 5%, while the board authorized the repurchase of an additional $70 billion in stock, a measure just shy of Apple's newly added $100 billion in buybacks of its own.

Amazon's (AMZN) quarterly results were also solid. In the quarter, the company grew revenue 10% after adjusting for currency movements, while operating income surged 20% thanks to strength in its AWS segment, where division operating income jumped to $11.5 billion from $9.4 billion in the first quarter of 2024. Diluted earnings per share increased an impressive 62.2% in the quarter, assuaging concerns regarding the pace of earnings expansion, at least in the areas of big cap tech and large cap growth. Though Amazon was cautious in its outlook for operating income in its second quarter, the midpoint of its guidance range calls for year-over-year growth, while it targets a 7%-11% increase in the top line for the period.

Tesla's (TSLA) results left a lot to be desired this quarter, in our view, but news that CEO Elon Musk will lessen his day-to-day involvement in DOGE, has helped alleviate some pressure on the stock. We won't get Nvidia's (NVDA) quarterly results until later this month, but spending by the hyperscalers in big cap tech and large cap growth remains robust, suggesting to us that Nvidia will put up impressive numbers. All things considered, we think we made the right call with our wait-and-see approach, and we maintain our bullish stance on big cap tech and large cap growth, which we expect to lead the market higher as the year progresses. Alphabet and Nvidia remain the most underpriced, in our view.

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