Big Tech Earnings Weigh on US Markets, Sparking Concerns
Monday's market sell-off highlights the significance of Big Tech earnings for the ongoing bull market. Investor apprehension over increased competition in the AI sector, sparked by advancements from Chinese AI company DeepSeek, led to a pause in US AI investments.
Nvidia (NVDA) experienced a substantial 16% decline, while Microsoft (MSFT), Alphabet (GOOGL, GOOG), and Tesla (TSLA) all dropped by 2% or more. Broadcom (AVGO), a prominent AI player, plummeted over 17%.
Experts have long cautioned against the risk of slowing Big Tech earnings growth, given the high valuations of indices and the concentration of the S&P 500 in its top 10 stocks. This sudden uncertainty has led to a sell-off, underscoring the fragility of the market's reliance on technology sector gains.
Unlike other economic headwinds such as interest rate hikes or inflation, the potential collapse of Big Tech earnings growth has lacked a clear catalyst. DeepSeek's AI model has emerged as a tangible reason for investors to question future earnings expectations.
In 2024, the "Magnificent Seven" large-cap technology companies outperformed the S&P 500 by 30%. While their earnings growth is anticipated to moderate in 2025, Big Tech remains a crucial driver of the market's bullish outlook.
The "Magnificent Seven" stocks are projected to increase earnings by 21.7% in Q4 compared to a modest 9.7% growth forecast for other tech stocks. Their growth rate is expected to decelerate in Q1 but rebound to 24% in Q3.
Despite geopolitical concerns, market experts believe that fundamentals, including technology sector performance, will play a significant role in determining market returns in 2025.