Earnings estimates for mega-cap tech stocks have risen despite weakness in the overall market as the Nasdaq 100 Stock Index ($IUXX) (QQQ) dropped to a 3-1/2 month low last Wednesday. Over the past three months, analyst 2024 earnings projections for mega-cap technology stocks, such as Amazon.com (AMZN) and Meta Platforms (META), have risen by more than +10%, according to Bloomberg data. Also, 2024 earnings estimates for Alphabet (GOOGL) have risen 8%, and earnings estimates for Nvidia (NVDA) have soared 69%.
A hawkish Fed helped push the 10-year T-note yield to a 16-year high last week, which weighed on technology stocks. The fear is that the Fed’s intention to keep interest rates higher for longer to curb inflation could knock the economy into recession and fuel a slide in high-valuation technology stocks. Zevenbergen Capital Investments LLC believes the recent drop in mega-cap tech stock prices has reduced valuations enough to make the stocks attractive, saying, “We believe these stocks can outgrow the broader economy.”
The recent surge in T-note yields has punished technology stocks but the lower stock prices have reduced sky-high valuations. For example, Nvidia more than tripled in price this year, with its price-to-projected earnings ratio soaring to 63 in May. However, even as analysts continue to raise their earnings estimates for the company, the stock has fallen -12% from its record high in August and is now priced at 29 times profit estimates.
In a note to clients today, Goldman Sachs said mega-cap U.S. tech stocks are likely to do well during the Q3 earnings season after a recent selloff led to lower valuations and "The divergence between falling valuations and improving fundamentals represents an opportunity for investors." However, DataTrek Research believes recession fears may trump artificial intelligence (AI) euphoria, saying, “Tech stocks have had an orderly selloff despite higher rates because the market thinks their earnings will continue to hold up. However, the recent sharp ascent in interest rates could challenge that outcome.”
There are fears that an economic slowdown has not yet been priced into mega-cap technology stocks. According to Janus Henderson Investors, “If there’s any sort of hiccups in the economy when you’re priced close to your historical averages or even higher, there’s just a lot more downside risk.” However, Zevenbergen Capital Investments LLC thinks owning mega-cap technology stocks now is worth the risk, given their potential upside and appealing valuations, saying, “For those who want to create wealth and build wealth over time, it will likely pay to own equities and big tech is still attractive relative to other pockets of the market.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
