Tech Giants Face Reality Check as Earnings Growth Slows
As the tech sector’s biggest players prepare to release their quarterly earnings, investors are bracing for a dose of reality. Despite shares hovering near record highs, profit growth is expected to slow to its lowest pace in almost two years.
A Shift in Expectations
The so-called Magnificent Seven – Alphabet, Meta, Microsoft, Apple, Tesla, Amazon, and Nvidia – have driven a staggering $15 trillion rally in the Nasdaq 100 Index since 2022. However, with valuations stretched and AI investments yet to yield significant returns, the pressure is mounting.
Earnings Season Kicks Off
The reporting period begins this week, with Microsoft, Meta, and Tesla set to release their earnings on Wednesday. Apple follows on Thursday, while Alphabet and Nvidia announce next week. The sector’s superior earnings growth and AI hype have been key drivers of the US stock market’s bull run, but gains have slowed amid expectations of weaker profits.
Slowing Profit Growth
Profits for the seven giants are projected to increase by 22% in the fourth quarter, the smallest jump since the first quarter of 2023. While still above the S&P 500’s expected 8% increase, it’s a significant slowdown from the 51% increase seen in the first quarter.
Valuations Under Scrutiny
With the tech sector’s share of the S&P 500’s market value outpacing its share of profits, Bloomberg Intelligence’s Michael Casper warns that either earnings growth must improve or valuations need to drop. The S&P 500 Information Technology Index trades at nearly eight times revenue projected over the next 12 months, close to its highest level in at least a decade.
AI Investments: Worth the Cost?
Despite concerns over valuations, Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, believes AI investments will generate more revenue in the year ahead, making the valuations worth paying up for. The big tech firms have pledged to spend more on capital expenditures, with Microsoft, Alphabet, Amazon, and Meta projected to have spent over $200 billion combined in their last fiscal year.
Investors Remain Optimistic
So far, traders are not preparing for a massive disappointment. Demand for put options is shrinking, and bulls have been rewarded with Netflix’s recent strong earnings report. While valuations may be extended, and AI monetization remains a concern, the big tech firms remain cash-rich and dominant players in their respective markets.
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