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Dear valued reader,
Tech stocks have undeniably become a crucial part of the US market. With just seven companies accounting for nearly 30% of the S&P 500 index, their quarterly earnings are intricately tied to the success of this year’s market rally. In order to sustain this momentum, these companies must produce impressive results. I anticipate seeing modest growth, significant capital expenditures, and plenty of discussion surrounding artificial intelligence.
When you examine the market caps of the seven largest tech stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta – it’s astonishing how much they have grown over the past three years. Five of these companies are now valued at over $1 trillion. The question on everyone’s mind is, what comes next?
Two weeks ago, I had the privilege of participating as a guest on the FT’s Unhedged podcast. In a friendly debate with editor Rob Armstrong, we examined the so-called “magnificent seven” tech stocks. While we agreed that the tech sector is currently highly valued compared to historical standards and that overall growth is lackluster, we had differing opinions on the peak of AI hype. Rob believed that the hype had reached its zenith, whereas I contend that there is still more to come. The rapid increase in tech stock prices compared to the expectations of earnings growth may seem illogical, but the tech industry is far from rational. This is an industry that eagerly invests in AI companies, even if there’s the slightest chance that their products could cause our destruction. Despite the uncertainty, AI has instilled hope that a new revenue stream is about to be unlocked. Combined with workforce reductions, a pause in interest rate hikes, and reduced recession forecasts, this unexpected market rally has emerged.
Overall, the outlook for tech stocks is positive. Although Tesla faced some initial challenges with price cuts affecting operating margins, both Alphabet and Microsoft recently reported growth in revenue and earnings, albeit at levels that would have been considered subpar in previous years. Both companies made a point to emphasize their involvement in AI. Nvidia stands out with its high growth projections, indicating a promising year ahead.
Other tech giants are expecting moderate growth. Alphabet, which experienced a 41% increase in revenue in 2021, is projected to see a 6% increase this year. Amazon expects to match last year’s 9% growth, while Meta is likely to report a similar figure. Apple’s revenue may experience a decline.
On a positive note, the cost-cutting measures implemented after last year’s market decline are still yielding benefits. While net income margins may not reach the levels seen in 2021, they are expected to improve compared to last year. The main uncertainty lies in capital expenditure. Developing AI technology is a costly endeavor. Microsoft’s latest earnings call revealed a capex of nearly $11 billion in the last quarter, up from under $8 billion in the previous three months. However, there could be potential obstacles along the way. Investors may lose patience with the high cost of AI development. June Yoon, a fellow Lex writer, warns of the discrepancy between Nvidia’s market performance and the Asian companies supplying its chips, such as TSMC. This highlights a possible weak link in the AI narrative, as the availability of sophisticated semiconductors may be limited.
Determining the impact of this potential constraint will take months, as there is a time lag in chip supply. For now, the S&P 500’s significant tech concentration is not at risk of being overwhelmed.
In other tech news, if Elon Musk took a break from tweeting and read Gurwinder Bhogal’s newsletter, he would find valuable insights on the perils of trying to live up to one’s online persona. Additionally, Molly Young’s visit to Disney World, as shared in The Paris Review, sheds light on the park’s various interpretations and connections with art and culture. Lastly, Vox offers a comprehensive long read on Anthropic, an AI company prioritizing ethical responsibility.
We hope you have a wonderful week ahead.
Best regards,
Elaine Moore
Deputy Head of Lex
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