Sell-Off Underscores the Importance of Big Tech Earnings for Bull Market
Monday's market decline highlights the critical role of Big Tech earnings in driving the current bull market and investors' expectations for 2025.
Reports of Chinese AI firm DeepSeek's advancements triggered concerns about increased competition for Nvidia (NVDA) and other tech giants, prompting a pause in US AI investments. Nvidia's stock plunged over 16%, while Microsoft (MSFT), Alphabet (GOOG), and Broadcom (AVGO), key players in the AI space, also reported significant declines.
Analysts have been cautioning about a risk to the market due to a slowdown in Big Tech earnings growth for over a year. With valuations near multi-decade highs and the largest 10 stocks accounting for almost 40% of the S&P 500, the market's rapid ascent is seen as increasingly vulnerable.
Uncertainty surrounding DeepSeek's AI model has provided a tangible reason for investors to question the sustainability of high earnings expectations. Despite expectations of a slowdown in earnings growth in the coming year, Big Tech remains a crucial pillar of the bull market thesis.
The "Magnificent Seven" stocks, including MSFT, GOOG, and others, are expected to grow earnings by 21.7% in Q4 compared to 9.7% for the rest of the tech sector. While growth rates are projected to moderate in Q1, analysts anticipate a rebound to over 24% by Q3.
Monday's sell-off has reminded investors of the importance of fundamentals. Despite geopolitical factors, technology is still expected to play a dominant role in market returns for the year.