Big Tech Earnings: The Market's Achilles Heel
Monday's market sell-off highlights the importance of Big Tech earnings to the ongoing bull market and underscores investor concerns about future growth.
AI Competition Sparks Concerns
News from Chinese AI company DeepSeek has ignited competition fears for NVIDIA and other Big Tech players, triggering a pause in US AI trading. NVIDIA stock plummeted over 16%, while other "Magnificent Seven" members Microsoft, Alphabet, and Tesla declined by 2% or more. Broadcom, another significant AI player, shed over 17%.
High Expectations and Vulnerability
A slowdown in Big Tech's rapid earnings growth has been a market risk for over a year. With high index valuations and the largest stocks dominating the S&P 500, strategists have cautioned about the market's vulnerability. Keith Lerner of Truist emphasizes the need to question high earnings expectations in the face of uncertainty.
Earnings Growth Expectations
In 2024, the "Magnificent Seven" outperformed the S&P 500 by 30 percentage points. While growth is expected to moderate, it remains a crucial pillar of the bull market. The group is projected to grow earnings by 21.7% in Q4, compared to 9.7% for other tech stocks. Year-over-year growth for the "Magnificent Seven" is forecast to slow in Q1 before rebounding to over 24% in Q3.
Fundamentals Take Center Stage
Lerner believes Monday's sell-off has brought investors back to fundamentals. While political developments are important, he emphasizes that tech remains the driving force of market returns in 2025.
Conclusion
Big Tech earnings continue to shape the market's trajectory. Investor concerns about competition and slowing growth have highlighted the need for ongoing monitoring and careful consideration of earnings expectations.