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As earnings growth slows, big tech firms lose part of their allure.

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BIG TECH EARNINGS
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As earnings growth slows, big tech firms lose part of their allure.

Big Tech earnings are no longer delivering the same excitement, as growth in profits among leading tech giants is slowing. Once seen as invincible, companies like Apple, Nvidia, Microsoft, Alphabet, and Amazon are now reporting lower growth rates. This week’s earnings reports will be important in determining whether these tech stocks can still drive the broader market rally, but signs of a slowdown are clear.

The projected growth rate for Big Tech earnings this quarter is around 19%, well above the S&P 500’s 4.3% growth. However, this is their slowest growth in six quarters. The difference between Big Tech earnings and the rest of the market is also expected to narrow over the next couple of years, far from last year’s 35% growth. For investors, this raises questions: can Big Tech stocks keep up their impressive performance, or should investors begin exploring other sectors for returns?

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Big Tech Earnings facing high valuations

This earnings season, Big Tech giants are facing increased scrutiny as their high valuations meet rising doubts about future growth. In recent months, the tech sector has lagged behind other areas in the S&P 500, such as utilities and real estate, as high prices and slower growth prompt some investors to rotate into other sectors. As a result, Big Tech earnings are losing a bit of their former allure.

An important factor contributing to this shift is the substantial investment in artificial intelligence (AI) that Big Tech companies have made. While AI is often seen as the future, the immediate financial returns are limited. Microsoft, Alphabet, Amazon, and Meta, for example, are expected to have spent a record $56 billion on AI infrastructure this quarter alone. Although this investment is expected to yield benefits down the road, it currently adds to expenses without an immediate boost in profits, making investors cautious.

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For example, Microsoft has incorporated AI into its products, but it will take time for these features to generate revenue growth. Alphabet also faces challenges, such as a regulatory investigation from the U.S. Department of Justice. Meanwhile, Apple and Amazon have their own issues: Apple has encountered slow demand for its latest iPhones, and Amazon’s spending on infrastructure is impacting its profit margins. These challenges add to investor uncertainty around Big Tech earnings.

Another signal of the shifting tide is the performance of the “Magnificent Seven” (Apple, Amazon, Microsoft, Alphabet, Nvidia, Meta, and Tesla) — a group that includes Big Tech’s leaders. While they initially led the market rally, these stocks have underperformed compared to other S&P 500 sectors in recent months. Although Tesla recently reported strong profits, the rest of Big Tech earnings this season will reveal if this trend of slowing growth persists.

However, despite these shifts, many Wall Street analysts remain positive on Big Tech. The long-term potential for growth, especially with AI, still appeals to investors. Most analysts covering Microsoft, Alphabet, and Nvidia have buy ratings, reflecting optimism about Big Tech earnings over the long term.

Still, Big Tech stocks come with high price-to-earnings ratios that could be risky if earnings growth doesn’t meet expectations. For example, Apple’s stock is trading at a high multiple compared to historical averages, raising concerns that current valuations may be unsustainable if growth continues to decelerate. While the “fear of missing out” might keep some investors on board, others are being cautious, aware that sentiment around Big Tech earnings is increasingly volatile.

In summary, while Big Tech earnings growth is slowing, the sector still holds considerable potential. AI investments and dominant market positions mean these companies will likely remain central to tech’s future. However, they may no longer be the market’s only drivers, and investors should be prepared for more moderate returns as Big Tech companies navigate these changes.

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