Bloomberg — The continued advance of big technology companies has been a symbol of faith for investors since The last stock market rally began in the month of October 2022.
However, with bleak earnings forecasts for the remainder of 2024, other market cornerstones will likely be needed if share prices are to continue rising.
Big tech companies drive the S&P 500 rally. The Rest has to improve soonMeta Platforms, Facebook’s parent company, is the second company whose share has risen so far this year, adding 39%.(SOPA Images)
“For the market to have similar profitability in the second half, we would need to see broader participation,” he said. Keith Lerner, Co-Chief Investment Officer and Chief Market Strategist at Truist Advisory Services.
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That may happen. Although Big Tech’s profit growth is expected to slow considerably from this point, it is expected that sectors such as materials and healthcare experience growth of around 25% in the fourth quarter, after recording contractions of 20% or more during the first quarter.
Big technology companies drive the S&P 500 rally. The rest will have to improve soonA slowdown in profit growth is expected for large technology companies, with a percentage change in profits.(Bloomberg Intelligence)
“I think those sectors are starting to look pretty interesting, and I’m talking about energy, materials, consumer discretionary, industrials, financials,” he said. Ohsung Kwon, quantitative and equity strategist at Bank of America (BAC). “I think all those cyclical sectors are going to do better in the second half of the year.”
That rotation already appears to be underway. At BofA, clients withdrew nearly $2.2 billion from technology stocks during the week ended May 31, the second-most in the bank’s data dating back to 2008.
The largest customer inflows They targeted the consumer discretionary sector, which is up 1.9% this year, making it the second worst performer in the S&P 500.
“The discretionary sector is traditionally a big driver of S&P 500 earnings and a place that often picks up declines,” he said. Michael Casper, Bloomberg Intelligence equity strategist.
You can’t give up technology
None of this means that investors will, or should, give up on big technology. The S&P 500 is up 12% this year, and its five largest stocks, Microsoft Corp. (MSFT), Apple Inc., Nvidia Corp. (NVDA), Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN) , are responsible for more than half of that profitwith markets captivated by the rise of artificial intelligence.
Read more: Why Nvidia surpassed Apple in market capitalization and could also surpass Microsoft?
In the process, those five companies have added a combined market value of $2.9 trillion in 2024. That has helped make information technology by far the largest sector in the S&P 500, with a weighting of 31%. The next closest groups are financial and healthcare, with around 12%.
What’s more, it’s not that technology companies have stopped growing. It’s just that he The pace of profit expansion is slowing.
After three consecutive quarters of more than 44% earnings growth, the five largest companies in the S&P are expected to see that figure fall to 29% in the second quarter, before settling into the teens in the second half of the year. , according to data collected by BI.
“We still think Big Tech is likely to outperform, but at a more moderate level,” Lerner said. “Investors will continue to stick with these companies, which are high quality, have strong cash flow, lots of cash on the balance sheet.”
In many ways, companies They are suffering from their past success, as its strong 2023 results make comparisons to 2024 difficult. But companies continue to grow profits and generate healthy margins following aggressive cost-cutting efforts.
‘High expectations’
“It is the responsibility of big technology companies to live up to high expectations,” he says. Adam Sarhan, founder of 50 Park Investments. “Otherwise, the stock market will be forced to recalibrate and sell, especially if earnings growth in other sectors does not improve from now on.”
Part of the challenge for technology investors is that stocks are already quite expensive.
Nvidia is trading at 40 times forecast earnings for the next 12 months, compared to 21 times for the S&P 500. Microsoft is at 33 times, and Apple is at 29 times. Even Alphabet, which is relatively cheaper at 21 times, is trading above its 10-year average.
Big technology companies drive the S&P500 rally. The rest will have to improve soonValuations of big technology companies | Expected price/earnings ratio versus the S&P 500, from the valuations of large technology companies.(Bloomberg)
“As those non-tech sectors start to increase their profits, the premium that investors were paying for technology should decline on a relative basis compared to other sectors,” said BofA’s Kwon.
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An asymmetry is also emerging in the directions of Big Tech stocks as the companies’ earnings outlooks diverge.
With investors focused on AI, Nvidia has soared ahead of the restrising 144% this year and remaining the top performer in the S&P 500.
Meta Platforms (META), parent of Facebook, has added 39%, while Alphabet, parent of Google, has risen 25% and Amazon has gained 21%. Microsoft, on the other hand, hasn’t really kept up the pace, posting a relatively meager 13% rise.
And then there is the feisty Apple, which spent most of the year in the red and has risen only 2.3% in 2024.
“The core business lines of each of these companies are no longer moving in the same direction as they were during the pandemic recovery, so that is also causing profits to cool,” says BI’s Casper. “The magnificent seven stocks no longer move as an omnipresent block, and that hurts their earnings potential as a cohort because trading has now broken down.”
Choose sectors
Counting on a boost from the rest of the market carries its own risks, however.
For example, the Health sector margins falter despite enthusiasm for anti-obesity drugsbecause the group continues to deal with accusations from Big Pharma.
Meanwhile, consumer discretionary sector profit growth is being driven by just a handful of companies, such as Amazon and home improvement retailer Home Depot Inc (HD).
That means more sectors than those will have to post earnings growth, particularly consumer discretionary and those that are closely linked to the health of the economy: the industrial and the financialCasper said. However, there are risks embedded in each of these groups.
“Consensus earnings forecasts are pretty poor for most retailers not called Amazon,” he said. “Financiers and industrialists could pick up the pace, although regional banks still face the hangover from (the bankruptcy of Silicon Valley Bank).”
In the end, the success of the stock market in 2024 may still come down to Big Tech, directly or indirectly. Given the AI is expected to have a transformative impact In so many industries, technological development is likely to spread to other parts of the economy, lifting those stocks along the way.
“As long as big tech companies continue to meet their earnings forecasts, it bodes well for the economy,” says 50 Park’s Sarhan. “Which will help drive the stock rally even further because there are other industries outside of technology that will benefit from AI.”
Read more at Bloomberg.com
