Is the market right? Tech giants' earnings reports "crush" the US stock market

Tech giants once again "won" the Federal Reserve, helping SPDR S&P 500 achieve its best performance in over three weeks, offsetting the decline in the first three days of this week. Looking at the stock market's gains since the beginning of the year, the "celebration" of a few stocks continues. As of January 29th, the top 5 stocks in market value contributed to 70% of the gains.

This week, five out of the "Big Seven Tech Giants" released their earnings reports - Alphabet, Microsoft, Apple, Amazon, and Meta Platforms (which account for nearly 25% of the SPDR S&P 500 index). "Beating market expectations" became a common feature of the earnings reports of these 5 tech stocks:

Meta Platforms delivered its strongest earnings report in company history, with fourth-quarter performance and first-quarter guidance exceeding Wall Street expectations. They also announced a $50 billion stock buyback and the first-ever dividend in company history.

Amazon's cost-cutting efforts paid off, with better-than-expected net sales in the fourth quarter, and first-quarter performance guidance is also roughly better than expected.

Apple lived up to expectations and delivered better-than-expected Q4 results, with record-high EPS and iPhone sales exceeding market expectations. Service revenue reached a new high for the fourth consecutive quarter, but revenue from the third-largest market, Greater China, declined by approximately 13% YoY, exceeding expectations.

Google's parent company, Alphabet, exceeded expectations in Q4 revenue and profit, and its cloud computing division achieved profitability for the first time in a year.

Microsoft achieved its best quarterly revenue growth in nearly two years in Q4, and achieved record-high revenue for five consecutive quarters. Key indicators such as EPS and cloud business revenue growth exceeded market expectations.

UBS bluntly stated that the six "tech giants" (including NVIDIA but excluding Tesla) will continue to benefit from a clear path to profitability. Driven by fundamentals rather than market sentiment, these tech giants may continue to lead the way in 2024: Comparing the six major tech giants with other tech stocks:

Earnings per share: In Q4 2023, the six major tech giants saw a YoY increase of 57.0% in earnings per share, while other tech companies only grew by 4.1%. In 2024, the EPS of the six major tech giants is expected to increase by 21.6% YoY, while other tech companies are projected to grow by only 12.9%.

Profit expectations: The profit expectations for Q4 2023 and 2024 have been raised by 4.0% and 4.8% respectively for the six major tech giants, while the profit expectations for other tech stocks have only been raised by 3.0% and have been lowered by 1.8% for 2024.

Comparing the six major tech giants with non-tech stocks:

Earnings per share: Excluding tech companies, the overall market's earnings per share may see a YoY decrease of 4.7% in Q4, while the six major tech giants are expected to see a YoY increase of 57.0% in 2023. It is projected that in 2024, the SPDR S&P 500's earnings per share, excluding tech companies, will increase by 6.4% YoY, while the earnings per share of the six major tech companies will increase by 21.6%.

Profit expectations: Since the end of Q3, the earnings expectations for Q4 2023 and 2024 have been lowered by 9.4% and 3.4% respectively for the SPDR S&P 500 index (excluding tech stocks), while the profit expectations for the six major tech giants have been raised by 4.0% and 4.8% respectively.

Therefore, fundamentally speaking, although the P/E ratio of the US tech giants is currently at 28 times, much higher than the average P/E ratio of 17 times for small-cap tech stocks, the large tech stocks may continue to be the driving force behind the rise of the US stock market as the AI boom continues.

Will the era of US stock market "giants" continue?

In 2023, the AI boom showcased the profit-making ability of the tech giants, and Bank of America coined the term "Magnificent 7" to refer to these seven companies, which contributed to 82% of the rise in the SPDR S&P 500 index for the year, with Microsoft and NVIDIA alone contributing to around 75% of the increase.

Some analysts believe that the trading and performance of the SPDR S&P 500 index is the most concentrated since the 1970s, and the breadth of the stock market's rise is the worst in history. However, high trading concentration is often unsustainable, so the disintegration of these seven tech giants in the stock market is not a question of "if," but rather "when." Morgan Stanley bluntly stated that the current market rally relies on a few super-weighted stocks, similar to the dot-com bubble:

Currently, the valuations of US tech giants are too high, and the market rally relies on a few super-weighted stocks. In the face of uncertain macro-financial environment and other factors, once these few stocks experience a significant decline, the market will also shake.

Jon Wolfenbarger, a former investment banker at Bank of America Merrill Lynch, also stated that the market is experiencing the era of "Tech Bubble 2.0", and the tech stocks "Big Seven" may become stumbling blocks for the future market:

"Considering that the current stock market valuations are even higher than in 2000, it can be expected that there will be similar crashes in the upcoming economic recession."

However, some analysts believe that it is worth noting that the tech stocks "Big Seven" have already proven in the past that they achieve significant revenue growth in any economic situation. For example, their performance growth and market returns in 2023 were achieved against the backdrop of highly uncertain economic prospects and aggressive interest rate hikes. It can be seen that this situation is different from the dot-com bubble period:

At that time, investors poured money into any company with the word "Internet" in its name, including those that couldn't even explain their business models, let alone have a clear path to profitability.

Therefore, in terms of performance and valuation levels, it is expected that in the next two years, the earnings of the "Big Six" will grow at an average rate of 11%, while the average annual growth rate of other companies in the S&P 500 index will only be 3%. It is projected that the net profit margin and earnings per share growth of these six giants will be nearly twice that of the "remaining 493 companies".