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(Bloomberg) — Investors are heading into yet another pivotal Big Tech earnings cycle with the companies’ shares near record highs and valuations stretched. A key distinction this time: The group’s profit growth is projected to come in at the slowest pace in almost two years.
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Shares of Alphabet Inc. (GOOG), Meta Platforms Inc (META). and other technology giants have rallied to start the year, outperforming the broader market amid a risk-on mood and high hopes for the billions of dollars the companies are spending to develop artificial-intelligence services.
But the reporting period that kicks off this week may prove sobering for equities bulls: While earnings from the so-called Magnificent Seven behemoths are still rising — and far outpacing the rest of the market — Wall Street anticipates a marked slowdown in growth relative to prior quarters. What it comes down to is that pressure is mounting on the cohort, which has driven a roughly $15 trillion rally in the Nasdaq 100 Index since the end of 2022.
“This should be a fairly good earnings season, but the bar has been raised and they may not be able to live up to high expectations,” said Dan Taylor, chief investment officer at Man Numeric. “It will be very difficult for the group to perform the way it did last year, especially as valuations have increased.”
The seven companies’ announcements start Wednesday, when Microsoft Corp (MSFT)., Meta and Tesla Inc. (TSLA) are scheduled to report. Apple Inc (AAPL). follows Thursday, while Alphabet and Amazon.com Inc. (AMZN) announce next week, and then chipmaker Nvidia Corp (NVDA). on Feb. 26.
The sector’s superior earnings growth and exuberance around AI have been key drivers for US stocks during the bull market that began more than two years ago. The megacap tech companies have accounted for the bulk of the S&P 500’s roughly 70% advance in that period, but gains have slowed amid expectations for weaker profits and questions about when all the AI investments will pay off more meaningfully.
Smaller Jump
Profits for the seven giants are projected to increase by 22% in the fourth quarter from a year earlier, the smallest jump since the first quarter of 2023, data compiled by Bloomberg Intelligence show. While that’s still well above the 8% increase anticipated for the S&P 500 Index (^SPX), it’s down from the 51% increase seen in the first quarter and shrinking for a fourth straight quarter.