Big Tech Earnings: Driving Force of Bull Market, Concern for Investors
Monday's market sell-off highlights the critical role of Big Tech earnings in the current bull market and the growing investor concerns for the sector's future performance.
AI Disruptions Spark Sell-Off
Developments from Chinese AI company DeepSeek triggered investor anxiety about increased competition in the AI space, particularly for Nvidia (NVDA) and other Big Tech giants. This led to a pause in US AI trading, with Nvidia shares plummeting over 16%.
Microsoft (MSFT), Alphabet (GOOGL), Tesla (TSLA), and Broadcom (AVGO) also experienced significant declines of 2% or more. "High expectations make markets vulnerable to negative headlines," noted Callie Cox, chief markets strategist at Ritholtz Wealth Management.
Slower Earnings Growth a Concern
Strategists have long warned about the risk of a slowdown in Big Tech's rapid earnings growth. With index valuations at multi-decade highs and the top 10 stocks accounting for nearly 40% of the S&P 500, the rally has been seen as increasingly fragile.
"Uncertainty in the AI market has led to a knee-jerk sell-off," said Keith Lerner, co-chief investment officer at Truist. "The biggest risks are often the ones we don't anticipate."
Magnificent Seven Performance
In 2024, the "Magnificent Seven" (MSFT, GOOGL, AAPL, AMZN, NVDA, TSLA, META) outperformed the S&P 500 by 30 percentage points. While growth is expected to moderate, Big Tech earnings remain a key pillar of the bull market thesis.
The "Magnificent Seven" is projected to grow earnings by 21.7% in the fourth quarter, compared to 9.7% for the remaining tech stocks. Year-over-year growth is expected to accelerate to over 24% in the third quarter.
Back to Fundamentals
Lerner believes the sell-off reflects a return to fundamentals. "Tech remains a major driver of market returns, but investors are also considering other factors, including Washington policy," he said.