Big Tech's Earnings Slump Prompts Market Sell-Off, Raises Concerns for 2025
Developments in artificial intelligence (AI) from Chinese firm DeepSeek have ignited investor anxiety over competition in the sector, leading to a significant sell-off in US markets on Monday.
Nvidia (NVDA), a major player in the AI space, witnessed a drop of over 11% in its stock value. Other tech giants, collectively known as the "Magnificent Seven" - Microsoft (MSFT), Alphabet (GOOG), Meta (META), Amazon (AMZN), and Tesla (TSLA) - all experienced declines of 2% or more. Broadcom (AVGO), another prominent player in AI, lost over 12%.
Experts have long predicted that a slowdown in tech earnings could pose a risk to the market. With valuations reaching multi-decade highs and the 10 largest stocks constituting nearly 40% of the S&P 500, analysts have cautioned that the bull market is vulnerable.
However, unlike other risks such as rising interest rates or inflation, there has been no concrete reason for the potential collapse of big tech's earnings growth. The launch of DeepSeek's AI model has now provided investors with a tangible catalyst to question the sustainability of high earnings expectations.
In 2024, the Magnificent Seven's earnings outperformed the S&P 500 index by 30 percentage points, according to Goldman Sachs research. While this margin is projected to decrease, analysts believe that big tech's earnings growth will remain a crucial driver of the bull market.
The Magnificent Seven is expected to post earnings growth of 21.7% in the fourth quarter, compared to 9.7% for the remaining 493 tech stocks. Year-over-year growth is anticipated to decelerate in the first quarter before rebounding to over 24% by the third quarter.
Barclays' Venu Krishna emphasizes that given the substantial earnings growth projected for big tech in 2025, the sector will likely remain a critical driver of earnings per share (EPS) growth for the S&P 500.