To The Moon

The results of the top three US tech giants are about to be announced, and “AI faith” is about to be tested

Some Wall Street investors and retail investors are increasingly worried that the “two major engines” driving the surge in technology stocks this year may face a standstill. This was particularly evident last Thursday. The Nasdaq 100 Index, known as the “global tech stock weather vane,” recorded its biggest decline in five months. The main logic is that $Netflix(NFLX)$ 's disappointing overall performance and $Tesla Motors(TSLA)$ 's mixed performance data hurt market risk appetite and tech stock prospects. Meanwhile, strong employment data highlights investors' concerns that the Federal Reserve may not immediately end its most aggressive monetary tightening cycle in decades, as expected by the market.

However, investors are also not allowed to review last week's market in detail.An even more important “tech stock test” is coming soon. This week, up to 170 S&P 500 stock companies (accounting for 40% of the index's total market value) will announce their results, including the three tech giants — “AI leader” $Microsoft(MSFT)$ , as well as $Meta Platforms, Inc.(META)$ , which has also been deeply involved in the AI field for many years, leading global AI development, and Google's parent company $Alphabet(GOOGL)$ .

On Wednesday local time (2 a.m. Beijing time on Thursday), after the Federal Reserve announced its latest interest rate decision, Federal Reserve Chairman Jerome Powell (Jerome Powell) will deliver an important speech at the press conference. Some analysts speculate that Powell may provide the latest clues about peak interest rates and the Fed's tolerance for inflation. Investors are betting that the expected 25 basis point rate hike will be the end of the current round of the Fed's interest rate hike cycle, the last rate hike.

Eric Diton, president and managing director of Wealth Alliance, said: “What investors are most worried about in the second half of this year is the attitude of the Federal Reserve.” “If interest rate hikes exceed Wall Street expectations (that is, the last rate hike in July), it will be very bad for technology stocks and growth stocks, and the overall valuation of the stock market will be hit.”

Growth technology stocks are very sensitive to interest rates. In the traditional valuation model, interest rates are generally used to calculate the current value of a company's earnings over the next few years. US technology stocks have achieved an “epic rebound” this year. The NASDAQ 100 index has risen as high as 40% over the years. The main logic is that the profit levels of technology companies have proven to be flexible during the Q1 earnings season. In addition, the Fed even kept interest rates unchanged at the last meeting, and market expectations that the Fed is about to end the interest rate hike cycle continue to heat up, which in turn has stimulated a rebound in technology stocks.

The market has high expectations for the performance of the big five tech giants

After achieving a sharp rebound this year, some technology stocks, including the top five US tech giants, were excited by breakthroughs in artificial intelligence technology, and their valuations have become very high. The expected price-earnings ratio of the NASDAQ 100 index has reached 29x. Although last Thursday was the worst day for tech stocks in months, the index continued its gains in the first half of the year. At the close of last week, the weekly decline was only a slight drop of less than 1%, while the overall increase in July was close to 2%.

Big tech companies are also important to the S&P 500 Index (S&P 500), the benchmark index for US stocks, because the huge market capitalization of these companies makes them have the greatest weight in this index. According to data compiled by Bloomberg Intelligence,The five largest companies by market capitalization in the index — Apple (AAPL.US), Microsoft, Amazon (AMZN.US), NVDA.US (NVDA.US), and Alphabet. These tech giants expect a price-earnings ratio of up to 30 times, the highest level since March 2022. This high level of valuation is almost double that of the other constituent stocks of the index.

Of course, to a certain extent, this also reflects people's expectations that after large technology companies actively cut costs, corporate profits will continue to improve with the help of AI technology.In fact, according to Bloomberg Intelligence forecasts, the top five S&P 500 stock companies are expected to increase their profits by an astonishing 16% in the second quarter. In contrast, Bloomberg Intelligence forecast data shows that the overall profit expectations of companies in the S&P 500 index for the second quarter fell 9% year-on-year, which is expected to hit the “bottom of performance” in recent quarters.

As for Microsoft, which is known as the global “AI leader,” Wall Street analysts expect that with the support of the powerful AI technology behind ChatGPT, Microsoft's fourth fiscal quarter revenue will reach 55.48 billion US dollars, setting a new high in Microsoft's revenue. It is widely expected that Microsoft's Q4 earnings per share will reach 2.55 US dollars. As for Meta and Google's equally strong performance expectations, Wall Street expects these tech giants leading the development of AI around the world to achieve accelerated revenue growth through AI technology.

There is almost no “room for mistakes” in the performance of tech giants

Stimulated by additional profit expectations brought about by artificial intelligence (AI), tech giants such as Microsoft and Nvidia have achieved a sharp rise in stock prices, with Nvidia even rising as high as 200% during the year. As a result, there is almost no “room for error” in the performance of these tech giants, and the market's tolerance for these companies' performance flaws will be very, very low.

Gina Martin Adams, chief stock strategist at Bloomberg Intelligence, said that other signs also indicate that corporate profits will improve in the second half of the year, especially if the easing of producer price index (PPI) inflation continues to boost profit margins.

She stated:“Basically no one talks about the possibility that the profit pressure on the top five S&P 500 companies will continue to ease.” “In fact, this may resolve on its own, as the other constituent stocks of the index may catch up with improved profits and higher valuations in the future. This will ultimately help support the gains in US stocks more broadly.”

Microsoft, which is scheduled to release financial reports on July 25, previously announced that the pricing of its enterprise apps is higher than many investors' expectations, raising hopes that the development of artificial intelligence will begin to reap high returns.

However, the sharp rise in the stock market since this year has caused some investors to worry about whether stock prices have already taken too much, that is, stock market expectations have gone too far. According to analysts who are staunchly watching the bearish market, highly valued technology stocks may experience an “bursting internet bubble” similar to the one in late 1999.

Cheryl Smith, portfolio manager and economist at Trillium Asset Management, said: “The tech industry's' FOMO '(fear of missing out) sentiment concerns me over the next few months.” “If you look back at the turn of the millennium, the certainty of the internet did change our lives, but in 1999, some investors lost large sums of money due to the market's irrational speculation about the internet industry, so you have to be very careful.”

Is the “bull market” of technology stocks and US stocks unstoppable?

The upward trend in the US stock market, especially US technology stocks in the first half of 2023, has continued into the second half of the year, continuously debunking the doubts of Wall Street analysts calling for an unbeaten market. Investors who are bullish on US stocks are still very confident about corporate performance. It is this optimism that helped the US stock benchmark index, the S&P 500 index, enter a “technical bull market” in the first half of this year and helped US stocks continue their gains in the second half of this year. The S&P 500 index (S&P 500) rose to a 15-month high last Wednesday, breaking the 4,550 mark for the first time since April 2022. The data shows that the S&P 500 index and the NASDAQ 100 index both rose close to 2% in July, continuing the gains since US stocks entered a “technical bull market” in the first half of the year.

According to some data, this “big rebound wave,” which has been led by only a few large technology stocks so far this year, is expanding to a wider range of US stock targets. If the rotating market continues, it is likely that US stocks will shift from a “technical bull” to an “overall bull” market. Goldman Sachs recently said that the profit margin boost brought about by AI may also further increase the boost to the US stock market as a whole.

Dan Ives, an analyst at Wedbush Securities, known as the “majority of tech stocks,” wrote in a report earlier,US technology stocks are preparing for a long-term upward trend. He expects overall US technology stocks to rise 12% to 15% in the second half of this year. This latest forecast is up from his previous forecast of 10-12%.The analyst said that technology companies may invest hundreds of billions of dollars in the AI GOLD RUSH (AI GOLD RUSH), which may trigger US technology stocks to continue to rise in the second half of this year.

Dan Ives also emphasized, “Although bears continue to worry about overvaluation of tech stocks and the uncertain macro context, we believe this is ultimately the beginning of a new round of tech stock bull market. We believe that, driven by the AI revolution and a stable IT spending environment, we expect US stocks to present a new bull market in technology stocks in 2024.”

Goldman Sachs expects that gains led by only a few large-cap stocks so far this year will continue to expand to a wider range of stock targets.Goldman Sachs provided two points of logical support for the logic that US stocks will continue to rise in the future. One is that the full popularization of AI provides important support for the growth rate of corporate profits, and the other is that the reduction in the probability of an economic recession has brought strong upward momentum to US stocks. At the beginning of July, Goldman Sachs's research team revised the forecast values of the S&P 500 index for the next 3, 6, and 12 months to 4,300 points, 4,500 points, and 4,700 points, respectively.

An early supporter of this round of the US stock bull market — Ed Yardeni (Ed Yardeni), known as the “Wall Street majority,” set the target point of the S&P 500 index at the end of the year at 4,600 points, and indicated that the prediction point may be raised to 4,800 points later.The president of Yardeni Research said, “Regarding the 4,600 point forecast, I have to admit that [this goal] seemed a bit unrealistic earlier this year, but the results were excellent.”

Brian Belski, head of BMO investments, saidIf earnings on technology stocks and bank stocks are better than expected for the rest of this year, the S&P 500 index may jump another 13% by the end of this year, reaching a record high. “Our bull market forecast is 5050 points, which means the S&P 500 index will hit a new high.He added: “We think this trend may be driven by surprising earnings growth, particularly the fourth quarter results.” He pointed out,The technology, communications, and finance industries are likely to perform better than expected.

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