The impressive rally in the stock market this year can largely be attributed to the strong performance of Big Tech companies. Despite recent market volatility, these tech giants have continued to outshine, proving their resilience.
DataTrek co-founder, Jessica Rabe, recently analyzed the so-called Magnificent Seven big tech firms: Apple, Amazon.com, Google parent Alphabet, Facebook parent Meta Platforms, Microsoft, Nvidia, and Tesla. Together, these companies make up around 28% of the total market capitalization of the S&P 500. Apple alone accounts for 7%, while Meta sits at 1.8%.
It’s no surprise then that the surge in the value of these stocks has also lifted the overall index. While concerns over exaggerated enthusiasm for artificial intelligence exist, Rabe argues that the tech boom is rooted in solid fundamentals, particularly when it comes to profitability.
A closer look at consensus estimates reveals that all of these tech companies, except Tesla, have experienced upward revisions in earnings estimates for the current third quarter, the current year, and 2024. In fact, Amazon, Meta, and Nvidia have seen double-digit percentage increases in their earnings estimates.
This stands in stark contrast to the overall downward revision of 0.4% for the S&P 500’s earnings this quarter and the 0.5% upward revision for the index projected for next year. Interestingly, among the Magnificent Seven, only Tesla is faced with downward earnings revisions across the board, resulting in a less favorable outlook compared to the S&P 500.
Overall, it’s clear that Big Tech’s exceptional performance is not simply a result of market hype but rather rooted in their impressive profit margins. This has positioned them as key drivers of the ongoing market rally.
The Magnificent Seven: Tech Stocks Continue to Surge
Amidst increasing optimism, tech giants Alphabet, Amazon, Meta, and Nvidia have all outperformed the S&P 500 with a rise of 0.8% over the past three months, according to Rabe. However, Apple and Microsoft have lagged behind due to analysts lowering their fourth-quarter earnings-per-share estimates for these two companies. This has created some uncertainty around their profitability.
Interestingly, despite the downward revisions in earnings estimates, Tesla’s stock has seen a 2.3% increase over the same period. Rabe explains that her firm views Tesla as more of a call option on the disruptive innovation of autonomous vehicles rather than a conventional equity evaluated solely based on future cash flows. Thus, Tesla’s profitability is not as critical as maintaining its strong market share in electric vehicles and reaching the personal transportation/AV ‘finish line.’
While investors appreciate companies taking cost-cutting measures, such as Cisco Systems’ recent layoffs, and showing continued innovation in the AI space, ultimately, it is the bottom line that matters most. This underlying factor has been driving the remarkable performance of these seven tech companies.
Furthermore, the tech sector has quickly rebounded from a minor setback in August. The Nasdaq Composite has surged with a year-to-date gain of over 30%, which is approximately double that of the S&P 500. Historical technical patterns suggest that this upward trend may continue, as sentiment reversals within the industry often precede significant bull runs, as noted by SentimenTrader earlier this month.
The Momentum in Tech: A Promising Outlook for Big Tech’s Winners
As we approach the third-quarter earnings season, there is no denying the enduring momentum in the tech industry. Despite the challenges that lie ahead, the winners of Big Tech have consistently surpassed expectations in the past and show no signs of slowing down.
This is not only great news for the individual companies involved but also for the market as a whole. The constant success of these tech giants sets a positive tone for the industry and continues to drive investor confidence.
The upcoming earnings season will undoubtedly be another test for Big Tech, but based on their track record, it seems likely that they will once again exceed expectations. Investors can remain optimistic, knowing that the winners of this sector are well-positioned to excel.
It is evident that the momentum in tech is not merely a fleeting trend. It is a testament to the resilience and adaptability of these companies who have consistently proven their ability to navigate challenges and deliver impressive results.
As we wait to see how the third-quarter earnings unfold, all eyes will be on Big Tech’s winners, as they have repeatedly demonstrated their capacity to thrive in an ever-evolving industry.
Let us eagerly anticipate another successful quarter for Big Tech, as they continue to showcase their unwavering prowess in the tech sector.