Tech stocks have been outstanding performers this year, but their momentum has recently slowed. However, with several major tech companies set to report their September-quarter results this week, investors are eagerly awaiting more information on business spending trends and the future of the industry.
One of the key factors driving the improved earnings outlook for the tech sector is the implementation of more effective cost controls, which have led to stabilized margins. Greater clarity on top-line trends will further solidify this positive trajectory and support the remarkable stock market momentum of the sector.
Another crucial topic of interest is the role of artificial intelligence (AI) in the industry. While some companies, like Nvidia and Microsoft, have already seen revenue impact from AI, the long-term potential of this technology is still a subject of debate. As we await the earnings reports from some of the biggest tech players, including Alphabet, Microsoft, Meta Platforms, and Amazon, it will be interesting to see how they are utilizing AI in their business models and what plans they have for the future.
As we analyze the year-to-date performance of the Zacks Technology sector and individual tech giants, it is clear that this group has experienced some sideways movement during Q3. Factors such as regulatory concerns and macroeconomic uncertainties have affected performance, but ad spending stabilization and investment in new AI capabilities have also played a role.
Looking at the earnings expectations for the ‘Big 7 Tech Players’ as a whole, we can see a steady increase in projected earnings growth for the current and upcoming periods. The Q3 estimates have risen from +21.5% three months ago to +34% currently, indicating a strong positive trend. This is supported by the chart showing the group’s earnings and revenue growth on an annual basis.
While the tech sector has faced challenges due to the pandemic, the worst of these difficulties seems to be in the past. The overall earnings growth for the technology sector is expected to be up +11.3% in Q3 compared to the same period last year, with +3.2% higher revenues. These numbers are significant in the context of recent quarters, where earnings growth remained negative for four consecutive quarters until Q2 of 2023.
Despite Q3 being the last period of declining earnings for the index as a whole, positive growth is expected to resume from Q4 onwards, according to current projections. The chart comparing the year-over-year Q3 earnings and revenue growth in recent quarters supports this expectation.
It’s important to note that, despite the positive growth outlook and the steady decrease in recessionary odds, there is still a disconnect between current earnings estimates and concerns about an impending economic downturn. However, economic analysts have been consistently lowering these recessionary odds in recent months.
As we anticipate the flood of earnings reports this week, it’s crucial for investors to pay attention to the results and projections of these major tech players. The information provided will greatly inform the market’s expectations and future investment decisions in the tech sector.