The recent round of earnings for the ‘magnificent seven’ has been greeted with indifference by stock markets. Could investors finally start to look beyond these tech giants for growth?
- Google parent Alphabet recorded the fifth largest decline by a US company in history
- Amazon.com, Meta Platforms and Microsoft all beat earnings and revenue expectations for the latest quarter.
- Big tech may have to do more than beat consensus expectations to interest investors
For much of the past decade, whatever the question, big tech has been the answer. Forget utilities, big tech was the new defensive sector. Exposure to AI, cloud computing or ecommerce? Look no further than the magnificent seven. Long term growth? Big tech had the answer for that as well.
In its response to the latest set of big tech results, there was a sense that investors may be tiring of this narrative. Google parent Alphabet recorded the fifth largest decline by a US company in history, losing $166bn in market capitalisation, after its results came out at the end of October. This was in spite of the technology giant beating expectations and reporting generally buoyant conditions.
It was a similar picture for the other technology and consumer giants. Amazon.com, Meta Platforms and Microsoft all beat earnings and revenue expectations for the latest quarter. They continued to report a healthy advertising market, with software spending improving. However, the market greeted the results with indifference, suggesting big tech may have to do more than beat consensus expectations to interest investors.
Part of the problem is that the big tech bulls have already bought, and the rest of the market views them as over-hyped and over-valued. These companies have dominated the market for so long that many investors are already overweight, and there is a growing recognition that the growth story may be mature. Even those that who still believe in the growth trajectory for these businesses are looking for innovation elsewhere.
There is plenty of it about, and at more compelling prices. Managers are looking at healthcare, for example, where genetic sequencing is opening up new avenues of growth. The energy transition is also throwing off significant innovation. Digitisation is creating opportunities. There are also a growing range of options among the ‘shovel providers’ – the technology is there to solve the world’s challenges, but now the world needs the infrastructure. Technology fund managers also predict greater focus on the benefits accruing to the users of innovative technology – those companies with large data sets, for example, that can reap the benefits of AI.
For the time being, the problem remains one of confidence. Investors may not feel brave enough to look beyond big tech while there is still uncertainty over the economic environment. However, clarity on the economic outlook and the extent of any US slowdown may see investors become more ambitious.
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