Big tech companies are running out of steam as the earnings momentum once enjoyed by the sector faces a cool down, according to UBS Group AG’s chief US equity strategist.
Ahead of this week’s earnings, UBS cut their sector recommendation on the ‘Big 6’ technology stocks — Alphabet Inc., Apple Inc., Amazon.com Inc., Facebook-parent Meta Platforms Inc., Microsoft Corp. and Nvidia Corp. — 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 note dated Monday.
Last week’s sell off in tech stocks saw the Nasdaq 100 Index 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, AI poster child, Nvidia plunged 10%, wiping out $212 billion in market value.
The rout took a breather Monday as the Nasdaq 100 Index rose 0.5%, with Nvidia among market leaders.
While investors have partially attributed the run in megacap stocks to the impact of AI, 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,” Golub wrote.
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 Google-parent Alphabet on Thursday.
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,” Golub said.
This article was provided by Bloomberg News.