Big Tech’s Roaring Profit Machine Eases Fears of Rally Reversal

(Bloomberg) — This earnings season has underlined that the big technology trade is here to stay, alleviating investor concerns that AI euphoria would falter after driving 2023’s market rally.

The Magnificent Seven group of tech firms — which includes Nvidia Corp., Meta Platforms Inc., Microsoft Corp. and Amazon.com Inc. — saw its average earnings per share rise 55% in the fourth quarter compared to a year ago, according to data compiled by Bloomberg. Most of that group has helped power the Nasdaq 100 index to a record high and its fourth consecutive monthly gain.

“There’s more recognition that AI is so important and what we’ll be talking about for the next couple of years,” said Ken Mahoney, president and chief executive officer of Mahoney Asset Management. “We’re benefiting from so many technologies that it really makes value stocks look pretty boring at the moment.”

Magnificent Seven Outperformace Picked Up In February | Earnings beats have lifted shares of big tech companies

Before the season started, Wall Street expected fourth quarter 2023 earnings per share to grow about 1.2%. Through Friday, after nearly 93% of companies have reported, earnings per share growth is 7.7%, according to data compiled by Bloomberg.

When it comes to tech, investors remain bought into the idea that the biggest companies are both a haven and growth asset. The largest firms have solid balance sheets and cash flows that have helped them navigate macroeconomic uncertainty and higher interest rates. Cost discipline has also been key, with Meta shares surging earlier this month after it announced $50 billion in buybacks and declared its first-ever dividend.

“That was a microphone drop. When a company can buy back $50 billion worth of stock, it’s crazy,” said Mahoney.

Signs of continued dominance in the AI field from the likes of Nvidia have provided a boost. Its blowout earnings report last week lifted the entire market, while illustrating that the firm’s earnings have been growing at a greater pace than the shares — which saw the biggest ever single-session increase in market value Thursday.

Amazon was also rewarded after it reported momentum in its cloud business and gave an operating income outlook that bested Wall Street expectations. “Outside of Nvidia, that’s our expectation for top performer,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments Inc.

Of course, not all of the Magnificent Seven stocks beat earnings expectations, or saw their shares immediately rise after reports. Apple shares came under pressure after its results showed slowing demand in China, but later recovered. Alphabet Inc.’s report also gave investors pause after it showed that search advertising revenue that failed to meet analyst estimates.

Tesla Inc. missed Wall Street estimates for its quarterly results and warned that it sees a lower rate of expansion this year, weighing on shares already under pressure. The slump has trimmed around $155 billion from Tesla’s market value this year, and it’s among the worst performers in the S&P 500.

Not everyone has counted it out, however. Tengler said her team picked up more Tesla stock when it traded around $180 per share earlier this year.

While concerns over the macroeconomic backdrop and potential for earnings growth remain, there are some signs that the market rally, which has been concentrated in the top technology names, is broadening out as investor risk appetite grows.

“There is a broadening out and I think you’ll see that continue as we go through the year,” said Tengler. “But that doesn’t mean the Magnificent Seven can’t continue to perform.”

Top Tech News

Fast-fashion company Shein is considering the possibility of switching its initial public offering to London from New York because of hurdles to the listing in the US, according to people with knowledge of the matter.Microsoft Corp.’s Mistral AI investment is set to be analyzed by the European Union’s competition watchdog at the same time that its deep ties to OpenAI Inc come under regulatory scrutiny.Artificial intelligence is likely to replace or at least lend a hand in tasks that take up almost three-quarters of the time bank employees now spend working.Alibaba Group Holding Ltd. led the largest single financing round for a Chinese artificial intelligence startup, the latest in a string of sizable investments that suggest the e-commerce firm is again deploying capital in the hunt for growth.Abu Dhabi’s International Holding Co. is adding an AI-powered observer to its board, a move that the $238 billion firm said will help human board members make better strategic decisions.Expedia Group Inc. is eliminating about 9% of its workforce after announcing a leadership transition earlier this month while the online travel company attempts to revive growth and regain market share.

Earnings Due Tuesday

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