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Big Tech stocks have been the dominant market theme this year and, indeed, for most of the last two years, driving major indices higher, powering the lion's share of a record run in stocks that has defied the impact of a hawkish Federal Reserve and surging Treasury bond yields.
And even with investors navigating a big disparity in performance among the so-called Magnificent 7 mega-cap stocks, with Tesla effectively jettisoned from the collective amid its 40% collapse, the sector remains crucial for overall market growth.
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The US Technology Index rose 13.1% over the first three months of the year, driving an overall gain of around 10.2% for the S&P 500 benchmark. Nvidia paced the overall performance with a 58.2% surge, adding some $1.1 trillion to its overall market value.
Bets on the power of AI technologies to transform a previously moribund chip sector (and the broader tech space itself) were a large part of this year's gains as investors pumped the value of stocks like Nvidia, Google parent Alphabet, Meta Platforms, and Microsoft on the back of their updated AI visions.
They also punished stocks such as Apple, the market's previous tech titan, for its lagging AI strategy (tied in part to fading iPhone demand forecasts), pulling the stock to a year-to-date decline of around 11%.
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The start of the second quarter has been decidedly more difficult for the biggest tech stocks, however. Nvidia (NVDA) fell 14% last week, its biggest five-day fall in over a year and a half, and the broader Magnificent 7 lost a collective $1 trillion in market value.
And with the S&P 500 mired in its biggest drawdown since last October and Morningstar's US Technology Index down 8.3% since the start of the second quarter, this week's tech earnings slate is in stark focus.
Meta kicks off Big Six earnings parade
"For better or for worse, it is tech earnings week with Microsoft, Meta, and Google being the headliners," said Chris Fasciano, portfolio manager at Commonwealth Financial Network. "Those earnings reports are likely to determine whether the tech sell-off ends or continues or perhaps we continue to see investors differentiate between the growth outlooks for some of these high-profile growth companies that have led the market over the last couple of years."
UBS Global Research analyst Jonathan Golub, however, warns that the pace of AI-driven earnings growth is set to slow considerably over the coming quarters, with a potential for outright collapse by the end of the year.
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In a note published on April 22, Golub and his team downgraded the collective Big Six tech basket to 'neutral' from 'overweight,' citing the difficult (year-on-year comparisons) and cyclical forces weighing on these stocks."
"Investors attribute the run in mega cap stocks to animal spirits and the impact of AI; however, our work indicates that surging earnings momentum fueled this upside," Golub wrote. "Unfortunately, this momentum is collapsing, with Big 6 EPS growth expected to decline from 42% to 16% over the next year.
There's already early evidence of an earnings growth slowdown ahead of March quarter updates from Meta on April 24 and Microsoft and Alphabet on April 25.
"Earnings are projected to quickly renormalize in mega-cap tech, following a sharp decline in profit growth from 4Q23-3Q24," Golub predicted.
Big Tech Earnings growth set to 'normalize'
LSEG data suggests Microsoft's (MSFT) earnings will grow 15.5% from last year to around $2.83 per share, but that's a notably slower pace than the 26.3% and 27.2% growth rates recorded over the previous two quarters
Meta Platforms (META) will likely see profits double from last year to $4.32 per share but also see growth slow from 202% in the fourth quarter of last year and 167% over the three months ending in September.
That also appears true for Google-parent Alphabet (GOOG) , the only Big Six stock in positive territory for the month. Its earnings growth is estimated at 29.9%, down from 56% and 46%, respectively, over the prior two reporting periods.
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Those are still very healthy levels of advancement. Still, muted outlooks from cloud computing rivals such as Salesforce (CRM) and Snowflake (SNOW) have some investors worried about corporate spending capacity over the back half of the year.
Amazon (AMZN) will publish its March quarter earnings on April 30, with Apple (AAPL) following on May 2. Nvidia is slated to update investors on May 22.
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"With stocks under pressure and rate cut hopes fading, we think the bar is higher for tech firms to deliver on earnings expectations – and for other sectors to show an earnings recovery," BlackRock analyst Jean Bolvin noted in his Weekly Market Commentary report, published on April 22.
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That said, while BlackRock sees further upside from what it calls the "AI and digital disruption mega force – a structural shift driving returns now and in the future" it hints that further growth might come from names beyond the Big Six.
"We went overweight early AI winners and enablers like chip and hardware makers in 2023," Bolvin said. "That view paid off as some valuations soared above historical averages.
"[Now] we are eyeing potential winners further up the technology stack – the layers of technology needed to develop AI applications – and beyond as AI adoption spreads," he added.
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