With about 20% of companies in the S&P 500 index having reported earnings for Q4 of last year, it is now Big Tech’s turn. Six out of the seven largest companies in the S&P 500 index (Apple, Microsoft, Amazon, Meta, Alphabet, Tesla), making up roughly 26.4% of its market capitalization, are due to report between later this week and early next week. Notably absent from this list is Nvidia, the now 3rd largest company in the world, which always reports later in the season.
Big Tech reports couldn’t come at a more opportune time. The segment’s earnings growth rate is expected to slow down significantly in 2025, still outpacing the rest of the index but by a much smaller margin compared to the last couple of years. So, analysts will be looking for clues to help them fine tune their estimates. Even before the latest developments out of China, the focus was going to be on the massive amounts of money that these companies have been plowing into AI-related investments, and whether or not such investments are beginning to pay off. All this spending is going to get a lot more scrutiny now that a small Chinese start-up has been able to develop an AI model on par with its most advanced US counterparts, seemingly at a small fraction of the cost. Even though details on DeepSeek were still scant, investors on Monday decided to sell first, ask questions later. The upcoming reports will provide an opportunity for executives to explain how they expect this development to impact their business in general and their AI strategy in particular.
For now, the dust from Monday’s sell off is still settling. So far, it seems that AI providers (e.g. Apple, Meta) may actually benefit from this development as they’ll be able to deploy a more efficient AI model, while AI developers (e.g. Alphabet, Microsoft) may be in a tougher spot due to increased competition. The clear losers so far appear to be Nvidia as well as power suppliers. Nvidia itself fell by ~17% on Monday, resulting in the biggest single-day market cap loss in history. However, in a scenario in which a cheaper and more efficient AI leads to a faster and more widespread adoption, demand for computing power and electricity should remain well supported. What is certain is that we are in uncharted territory, and we can only speculate as to what the AI landscape will look like a few years or even a few months from now.
If there is one lesson to be learned from this, it is about the importance of maintaining adequate levels of diversification and avoiding betting too much on a handful of winners. Because the winners may keep winning, until they don’t.
Source: Bloomberg, as of 1/27/2025
Source: FactSet Research, as of 1/10/2025
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
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