Big Tech Earnings Growth Uncertainty Triggers Market Sell-Off
Monday's market sell-off highlights the critical role big tech earnings play in the ongoing bull market and investors' expectations for 2025.
Renewed concerns over competition in artificial intelligence (AI) sparked by Chinese company DeepSeek led to a rout in tech stocks, with Nvidia (NVDA) dropping over 11%. Other "Magnificent Seven" members, including Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), fell by 2% or more.
Slowing big tech earnings growth has been anticipated by strategists for over a year. Despite high index valuations and a concentrated market where the top 10 stocks comprise nearly 40% of the S&P 500, the collapse of big tech earnings has lacked a clear catalyst.
However, the launch of DeepSeek's AI model over the weekend provided a tangible reason for investors to question the bullish earnings outlook.
In 2024, the "Magnificent Seven" outperformed the rest of the S&P 500 by 30 percentage points. While this margin is projected to narrow in 2025, big tech earnings growth remains a key pillar in the bull market thesis.
Analysts project earnings growth of 21.7% for the "Magnificent Seven" in Q4 compared to 9.7% for other tech stocks. Year-over-year growth is expected to slow in Q1 before accelerating to over 24% in Q3.
"Given the large earnings growth expected for Big Tech throughout the year," explains Barclays' head of US equity strategy, Venu Krishna, "the group is likely to remain as critical of an EPS growth driver for the S&P 500 as the group was [in 2024]."