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Weekly Market Analysis - Top Tech Takeaways – Companies Have to Spend Money to Make Money

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3 Things to Know

Tech’s “Magnificent 7” Beats EPS Consensus for Quarter 

After a summer of consolidation, the Nasdaq composite made a fresh record high last week.

Market-leading tech shares then fell back as large platform companies reported sharp increases in their investment spending on AI. All five of the “Magnificent 7” firms that reported EPS beat consensus expectations.

AI Bets and Direct Competition are Concerns

Whether today’s strong investment spending on AI will fully pay off in future profits has been an ongoing concern. Another risk is that the large firms compete more directly with each other than they have in the past.

“Magnificent 7” EPS Consensus Forecast for 2024: 28.2% 

High valuations have been a worry for some investors, but valuation has rarely been a performance catalyst for profitable tech firms with solid balance sheets.

Instead, shares have fallen and underperformed sharply when profits declined (notable drops were seen in 2000 and 2022). EPS gains for the Mag 7 were 43.3% in 2023. Consensus sees a 28.2% EPS gain in 2024 and 18.3% rise in 2025.

Summary

To say last week was a big one for Tech earnings is an understatement with five of the Magnificent 7 stocks, and many more, reporting their third quarter results. So far, we’ve heard from 348 of the S&P 500 companies and the aggregated results show firms beating consensus earnings and sales estimates collectively by 7.1% and 1.5%, respectively. Zeroing in on Technology, earnings and sales are topping the forecasts by 1.6% and 1.0%, and the sector is expected to generate faster earnings growth than the overall market in 2024-2026.

Dispersion between winners and losers is usually very wide in dynamic, innovative industries. We suspect that the intense focus on big tech may have driven too wide a performance divergence, however, creating potential opportunities for undiscovered smaller firms. There can be no promises made about individual firm prospects, but history suggest smaller, profitable innovators may be systematically undervalued compared to large firms (see chart).

Portfolio considerations

  • When one talks about “high equity valuations,” consider that the S&P 500 trades at 21.9 expected EPS but 19.3 excluding the Magnificent 7. Mag 7 firms have very different businesses, but collectively trade at 30x expected EPS with a 16% EPS growth pace over the past decade. Outside the US, the forward P/E is 13.3x. In terms of “rich valuations,” world equity markets are generally a story of a few “haves” and many “have nots.”
  • Keeping competitive threats, new technology and regulatory issues in mind, we still think it is prudent to own, but carefully manage, concentrated positions in US tech mega-caps.
S&P SMALL, MID & LARGE TECH FORWARD P/E

Source: Bloomberg, October 17, 2024. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.

Tech’s “Magnificent 7” Beats EPS Consensus for Quarter 

With just hours left to the US Presidential election, the Nasdaq and Nasdaq 100 made new record highs following a summer consolidation. Shrugging off bipartisan regulatory threats, this was powered by record profits, not political hot air. The early week rise was followed by a round of profit taking last Thursday as investors refocused on the rapid spending increases from the largest tech platform companies to cover costs needed to develop AI services. Markets reversed once again last Friday as good corporate news and a hurricane-distorted employment report drove modest declines in bond yields.

As mentioned, we’ve heard from 348 of the S&P 500 companies and the aggregated results show firms beating consensus earnings and sales estimates collectively by 7.1% and 1.5%, respectively. Zeroing in on Technology, earnings and sales are topping the forecasts by 1.6% and 1.0%, and the sector is expected to generate faster earnings growth than the overall market in 2024-2026.

While share prices can fluctuate in the shorter-term, especially in the richer corners of the sector, the longer-term earnings outlook and a wave of innovation appear supportive. Along with Healthcare, the greater “Tech” sector is one of just two that have seen its earnings and market cap share of the total grow over time. We believe this reflects the ongoing digital transformation of the economy underway which we consider to be an unstoppable trend.

AI Bets and Direct Competition are Concerns

AI spending plans were in focus, as companies across virtually every industry seek to leverage their data to enhance sales and make productivity improvements in the years ahead. Three of the reporting Mag 7 lie at the center of the cloud computing infrastructure so critical to bring this about. Collectively, these companies, based on their reporting, have capital spending plans totaling $179 billion in 2024 with the prospects of continued growth but likely at a moderating rate in 2025. This should translate into slowing revenue growth of leading AI chip players as a result.

In offering new AI services, we’ve long been concerned that several of the so-called “Magnificent 7” – the largest firms with tech-related businesses – might compete more directly with each other than they do today. And of course there are others: OpenAI, the developer of ChatGPT, isn’t even a public company.

With that said, it’s encouraging to see an accelerating return on investment of AI user cases among mega tech and their clients, with operating margins on AI revenue continued to ramp, likely supporting further investment. Companies with efficient capex management and transformation to profits have been greatly rewarded by the markets, while those who showed weaknesses, even for temporary reasons, experienced negative price reactions after the reports.

“Magnificent 7” EPS Consensus Forecast for 2024: 28.2% 

While share prices can fluctuate in the shorter-term, especially in the richer corners of the sector, the longer-term earnings outlook and a wave of innovation appear supportive. Along with Healthcare, the greater “Tech” sector is one of just two that have seen its earnings and market cap share of the total grow over time. We believe this reflects the ongoing digital transformation of the economy underway which we consider to be an unstoppable trend.

Overall, EPS gains for the Mag 7 were 43.3% in 2023. Consensus sees a 28.2% EPS gain in 2024 and 18.3% rise in 2025.

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In various jurisdictions (including, without limitation, the European Union and the United States) national authorities have certain powers to manage and resolve banks, broker dealers and other financial institutions (including, but not limited to, Citi) when they are failing or likely to fail. There is a risk that the use, or anticipated use, of such powers, or the manner in which they are exercised, may materially adversely affect (i) your rights under certain types of unsecured financial instruments (including, without limitation, BRRD Financial Instruments), (ii) the value, volatility or liquidity of certain unsecured financial instruments (including, without limitation, BRRD Financial Instruments) that you hold and / or (iii) the ability of an institution (including, without limitation, a BRRD Entity) to satisfy any liabilities or obligations it has to you. In the event of resolution, the value of BRRD Financial Instruments may be reduced to zero and or liabilities may be converted into ordinary shares or other instruments of ownership for the purposes of stabilisation and loss absorption. The terms of existing BRRD Financial Instruments (e.g., date of maturity or interest rates payable) could be altered and payments could be suspended.

There can be no assurance that the use of any BRRD resolution tools or powers by the BRRD Resolution Authority or the manner in which they are exercised will not materially adversely affect your rights as a holder of BRRD Financial Instruments, the market value of any investment you may have in BRRD Financial Instruments and/or a BRRD Entity’s ability to satisfy any liabilities or obligations it has to you. You may have a right to compensation from the relevant authorities if the exercise of such resolution powers results in less favourable treatment for you than the treatment that you would have received under normal insolvency proceedings. By accepting any services from Citi, you confirm that you are aware of these risks.

Canada: Citi Private Bank is a business of Citigroup Inc. (“Citigroup”), which provides its clients access to a broad array of products and services available through bank and non-bank affiliates of Citigroup. Not all products and services are provided by all affiliates or are available at all locations.

In Canada, Citi Private Bank is a division of Citibank Canada, a Schedule II Canadian chartered bank. References herein to Citi Private Bank and its activities in Canada relate solely to Citibank Canada and do not refer to any affiliates or subsidiaries of Citibank Canada operating in Canada. Certain investment products are made available through Citibank Canada Investment Funds Limited (“CCIFL”), a wholly owned subsidiary of Citibank Canada. Investment Products are subject to investment risk, including possible loss of principal amount invested. Investment Products are not insured by the CDIC, FDIC or depository insurance regime of any jurisdiction and are not guaranteed by Citigroup or any affiliate thereof.

This document is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities to any person in any jurisdiction. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially.

Citigroup, its affiliates and any of the officers, directors, employees, representatives or agents shall not be held liable for any direct, indirect, incidental, special, or consequential damages, including loss of profits, arising out of the use of information contained herein, including through errors whether caused by negligence or otherwise.

Citibank Canada Investment Funds Limited (“CCIFL”) is not currently a member and does not intend to become a member of the Canadian Investment Regulatory Organization (“CIRO”); consequently, clients of CCIFL will not have available to them investor protection benefits that would otherwise derive from membership of CCIFL in the CIRO, including coverage under any investor protection plan for clients of members of the CIRO.

Bahrain: IN BAHRAIN, CITI PRIVATE BANK OPERATES UNDER SPECIFIC APPROVAL ISSUED ON THE BASIS OF CITIBANK, N.A., BAHRAIN BRANCH’S BANKING LICENSE

Marketing and distribution of Investment Funds to clients in Bahrain requires Notification to the Central Bank of Bahrain and will be limited to UHNWI as defined below. Minimum investment subscription criteria will apply for products for all subscriptions for Bahrain domiciled clients.

Ultra-high net worth investors are:

  1. Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more
  2. Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or
  3. Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

Israel: This communication is directed at persons who are "Eligible Clients" as such term is defined in the Israeli Regulation of Investment Advice, Investment Marketing, and Investment Portfolio Management law, 1995 (the "Advisory Law"). This communication is not intended for retail clients and Citi will not make such products or transactions available to retail clients. The presenter is not licensed as investment advisor by the Israeli Securities Authority (“ISA”). The information contained herein may relate to matters that are not regulated by the ISA. Any securities which are the subject of this communication may not be offered or sold to any Israeli person except pursuant to an exemption from the Israeli public offering rules.

UAE: In the UAE, Citibank N.A. UAE Branch is licensed by the Central Bank of the UAE as a branch of a foreign bank.

The private banking business operates under Citibank N.A. UAE branch which is licensed with UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity of A) promotion under license number 20200000097 B) Trading broker in international markets under license number 20200000198.

Mutual funds distributed by Citibank N.A. UAE private banking business are registered with SCA.

The approval of SCA, in relation to the promotion of the investment products in the U.A.E. does not constitute a recommendation by SCA. to purchase or invest in the respective investment products and SCA accepts no responsibility and shall not be held liable for the failure of any concerned parties to fulfil their obligations and duties in relation to the investment products or for the accuracy and integrity of the data contained in the relevant subscription prospectus.

CONSUMER, CITIGOLD AND CITIGOLD PRIVATE CLIENT SEGMENT MARKET SPECIFIC DISCLOSURES

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs, and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

Singapore: This communication is distributed in Singapore by Citibank Singapore Limited (“CSL”) to selected Citigold/Citigold Private Clients. CSL provides no independent research or analysis of the substance or in preparation of this communication. Please contact your Citigold/Citigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this communication. Investment products are not insured under the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors, as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom it is unlawful to distribute such information or make any offer or solicitation.

Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Interested investors should seek the advice of their financial adviser about the issues discussed herein as appropriate. Should investors choose not to seek such advice, they should carefully consider the risks associated with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives and assess whether the investment product is suitable for themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

CSL does not provide discretionary portfolio management services.

UAE: Citibank NA UAE is registered with Central Bank of UAE under license numbers BSD/504/83 for Al Wasl Branch Dubai, 13/184/2019 for Mall of the Emirates Branch Dubai, BSD/2819/9 for Sharjah Branch, and BSD/692/83 for Abu Dhabi Branch. Tel.: 04 311 4000. Citibank, N.A. - UAE Branch is licensed by the Central Bank of the UAE as a branch of a foreign bank.

Citibank N.A. UAE is licensed with UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity of A) promotion under license number 20200000097 B) Trading broker in international markets under license number 20200000198.

Investment products are not bank deposits or obligations or guaranteed by Citibank N.A., Citigroup Inc. or any of its affiliates or subsidiaries unless specifically stated. Investment products are not insured by government or governmental agencies. Investment and Treasury products are subject to Investment risk, including possible loss of principal amount invested. Past performance is not indicative of future results: prices can go up or down. Investors investing in investments and/or treasury products denominated in foreign (non-local) currency should be aware of the risk of exchange rate fluctuations that may cause loss of principal when foreign currency is converted to the investors home currency. Investment and Treasury products are not available to U.S. persons. All applications for investments and treasury products are subject to Terms and Conditions of the individual investment and treasury products. Customer understands that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If customer changes residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Customer understands that Citibank does not provide legal and/or tax advice and are not responsible for advising him/her on the laws pertaining to his/her transaction. Citibank UAE does not provide continuous monitoring of existing customer holdings.

Product Key Fact Statements and all other fees and charges are mentioned in the Schedule of Fees and Charges can be found on our website - www.citibank.ae.

Citibank UAE is a distributor of mutual funds which are managed by asset management companies who are our third-party product providers. We use UBS AG as an intermediary for execution and custody services to offer equities, and bonds to our customers.

Mutual funds distributed by Citibank N.A. UAE Consumer Business are registered with SCA and structured notes distributed by Citibank N.A. UAE Consumer Business are approved by the Central Bank of UAE.

The approval of SCA, in relation to the promotion of the investment products in the U.A.E. does not constitute a recommendation by SCA. to purchase or invest in the respective investment products and SCA accepts no responsibility and shall not be held liable for the failure of any concerned parties to fulfil their obligations and duties in relation to the investment products or for the accuracy and integrity of the data contained in the relevant subscription prospectus.

The information provided herein does not constitute the marketing of any products or services to individuals resident in the European Union, European Economic Area, Switzerland, Guernsey, Jersey, Monaco, San Marino, Vatican, The Isle of Man, the UK, Data Privacy (GDPR, LGPD & NZPA)*

United Kingdom: This document is distributed in the U.K. by Citibank UK Limited and in Jersey by Citibank N.A., Jersey Branch.

Citibank UK Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our firm’s Financial Services Register number is 805574. Citibank UK Limited is a company limited by shares registered in England and Wales with registered address at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, Companies House Registration No. 11283101.

Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA.

© 2024 Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world.

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