MW Upbeat earnings will rescue tech from its DeepSeek dive, these market pros say
By Michael Brush
CEO confidence is increasing, and there are bullish signs for non-AI chip companies
Technology company earnings start rolling out in a big way this week. They'll be upbeat, and push the overall market higher - even after the DeepSeek-triggered stock market dive. Here are five key takeaways on what to expect, according to several market strategists and mutual-fund managers:
1. Tech companies will post good results, boosting investor sentiment and the overall market: The big question for investors is whether the large tech companies will post weak numbers and take down the whole market. "If the Magnificent Seven disappoint, they could drag the S&P 500 SPX down significantly since they account for a whopping 30.5% of the market cap of the index," noted Ed Yardeni of Yardeni Research. "They also account for a hefty 21.6% of the forward earnings of the S&P 500."
The good news is this dire scenario is not likely to happen. One reason is we've already gotten early signs the tech earnings season will be fine, said portfolio manager Dan Fletcher at the DWS Science and Technology Fund KTCAX. He cites recent earnings reports from Netflix Inc. $(NFLX)$ and Taiwan Semiconductor Manufacturing Co. Ltd. (TW:2330) $(TSM)$, both of which significantly beat estimates.
"We are off to a good start," Fletcher says. "It is hard not be anything but positive based on what we have seen so far."
2. The hyperscalers will confirm that AI spending growth is not letting up: A few weeks ago at the Consumer Electronics Show, Nvidia Corp. $(NVDA)$ said it sees no sign that hyperscalers are tapping the brakes in AI capital spending, according to Sean Sun, portfolio manager at Thornburg International Growth Fund TINGX. Taiwan Semiconductor affirmed on its recent earnings call that it expects robust, 45% compound annual growth in AI chip sales over the next five years.
Upcoming earnings reports from Microsoft Corp. $(MSFT)$, Alphabet Inc. $(GOOGL)$, Amazon.com Inc. $(AMZN)$, Meta Platforms Inc. $(META)$ and Apple Inc. $(AAPL)$, among others, will also shed light on AI chip-spending trends.
These optimistic forecasts were made before news that Chinese company DeepSeek reportedly built its AI platform for much less than U.S.-based companies spend. But Sun says hyperscalers are unlikely to adjust down projected spending on AI chips and AI infrastructure.
"DeepSeek is a good model, but it is a fast follower," Sun said. "It is not at the frontier. It is not where these companies aspire to be," he said, referring to the U.S.-based AI developers.
DeepSeek's reported lower cost base "does not change the long-term opportunity for spending on AI and AI infrastructure," added Fletcher, the DWS fund manager. "The race for AI dominance will remain whether there is a way to do it cheaper or not."
3. We'll get confirmation that Big Tech stocks are not in a bubble: Bears like to make the case that Microsoft, Nvidia, Alphabet, Amazon, Meta and Apple are in a bubble by overlaying their charts onto the charts of speculative tech names in the late 1990s.
This makes little sense because of one key difference, the tech team at William Blair argued in a recent research note. They pointed out that, since December 2019, the forward p/e multiples of those six stocks in particular have risen by a little over 20%, to 32 from 26. But the median return for the group is about 200%. "This suggests that the equity returns have largely been driven by a tangible growth in earnings, not a more speculative increase in the multiple."
Fletcher at the DWS fund said earnings estimates will continue to rise at these tech leaders after they report. This is another way of saying they will continue to "grow into" their valuations, undermining the bubble case. "None of these companies are at extreme valuations," he said. "If the fundamentals are strong and estimates go up, valuation matters less." Fletcher said he doesn't think expected strong earnings results are fully priced into the tech giants.
4. Bullish commentary this earnings season will confirm that CEO confidence is rising. This will boost overall investor sentiment and support stocks: Investors already are starting to see signs of CEO confidence on the rise, said Erik Swords, the head of global technology at Voya Investment Management. He cites commentary from management at Accenture $(ACN)$, JPMorgan Chase & Co. $(JPM)$, Salesforce Inc. $(CRM)$ and ServiceNow Inc. (NOW) Rising CEO confidence will be good for the economy and stock market because it means companies will boost their budgets - meaning more mergers and acquisitions.
"It is indisputable that it is a pro-growth environment," said Fletcher. Managers in charge of tech budgets "are more emboldened compared with last year when they were more defensive," he said. "They are looking to more aggressively invest in growth. One of the best investments is technology. The IT spending backdrop is good."
5. Investors may see evidence of an emerging turnaround in non-AI chip stocks: Non-AI chip stocks have been struggling. The problem for non-AI chip companies such as Texas Instruments Inc. $(TXN)$, Infineon Technologies AG (IFNNY), NXP Semiconductors N.V. $(NXPI)$ and STMicroelectronics N.V. $(STM)$ is the weakness in their automotive, industrial, PC and smartphone end markets. Chip inventories built up at companies in these sectors.
But there are signs that is changing. Taiwan Semiconductor said it is seeing a mild recovery in non-AI part of its chip business. Expectations are low, so even a mild recovery is good news. According to Sun, the Thornburg fund manager, "Cyclical downturns at most last a couple of years, and we are more than a couple of years into this correction."
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned NFLX, TSM, MSFT, AMZN, GOOGL, NVDA and META. Brush has suggested NFLX, TSM, MSFT, AMZN, GOOGL, NVDA, META, AAPL, JPM, CRM, NOW and NXPI in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
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-Michael Brush
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February 01, 2025 11:07 ET (16:07 GMT)
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