The momentum behind the shares of Big Tech giants that employ many thousands of people in Ireland is running out of steam as their earnings potential slows down, according to UBS Group.
Ahead of this week’s earnings for a large number of the so-called Magnificent 7 tech giants, UBS cut its recommendation for six of the companies — Google-owner Alphabet, Apple, Amazon, Facebook-parent Met, Microsoft, and chipmaker Nvidia — to neutral from overweight.
“Earnings momentum is turning decidedly negative following a surge in profit growth,” Jonathan Golub at UBS said.
The sector downgrade is “an acknowledgment of the difficult comps and cyclical forces weighing on these stocks”, and not “predicated on extended valuations, or doubts about artificial intelligence,” the strategist wrote in a research note.
Last week’s sell-off in tech stocks saw the tech-heavy Nasdaq 100 Index in the US registering its biggest weekly drop in more than 17 months. The slump extended the benchmark’s losing streak into a fourth week — the index’s longest since December 2022.
On Friday, the poster child for artificial intelligence, Nvidia plunged 10%, wiping out $212bn (€200bn) in market value.
The rout took a breather in the latest session, as the Nasdaq 100 Index clawed back some of its losses, helped by gains for Nvidia.
While investors have partially attributed the run in megacap stocks to the impact of artificial intelligence, UBS said the surging earnings momentum was driven by “asynchronous earnings cycles” spurred by the pandemic.
The tech stocks outside of that group didn’t participate in the pandemic-driven boom, but now consensus forecasts predict a reacceleration in earnings for those stocks.
Growth in earnings per share for the top six tech stocks is expected to slow down to 42% in the first quarter from 68% growth in the fourth quarter, UBS calculates. Growth for the rest of tech will eventually outstrip larger peers by the end of the year.
“Deceleration in large cap tech and acceleration in mid cap tech should lead to a reversal in stock leadership,” Mr Golub said.
Investors remain leery across the tech spectrum, pulling back on mega cap growth and tech stocks, according to analysts at Deutsche Bank. They will be watching closely when Meta reports on Wednesday followed by Microsoft and Alphabet on Thursday.
The fortunes of the tech giants are closely watched in Ireland for a number of reasons — including for the jobs they provide and for the billions of euro they provide to the Government here by way of corporation tax receipts.
Last year, the US tech firms accounted for the lion’s share of the almost €24bn in corporate taxes collected by the exchequer.
Even though a rotation out of tech could be disruptive in the near term, UBS continues to be constructive on stocks and maintains a 5,400 target for the S&P 500 Index for the end of the year, noting that it remains supported by a combination of broadly positive fundamentals and a robust economy.
“With the exception of the Big 6, all other sector recommendations remain in place,” Mr Golub said.