Technology stocks fired a warning shot on Friday ahead of earnings Technology stocks fired a warning shot on Friday ahead of earnings Technology stocks fired a warning shot on Friday ahead of earnings

Technology stocks fired a warning shot on Friday ahead of earnings

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Key points

  • US tech and communication sectors faced declines, while financials and utilities rose, signalling a shift towards value stocks over momentum stocks.

  • NVIDIA's stock plummeted 10% despite strong AI chip demand, influenced by concerns over increased competition and overvaluation risks.

  • Key earnings to watch this week include Tesla, Meta, Caterpillar, Microsoft, and Alphabet with market focus on revenue growth, cost-cutting measures, and performance metrics, impacting market sentiment.


Massive signal in technology stocks on Friday

The US session on Friday was brutal with information technology and communication services sectors down 3.1% and 2% respectively while financials and utilities were up 1.4% and 1.5% respectively. It was a classic move of risk-on in value stocks and risk-off in momentum stocks which is typically a sign of a potential bigger rotation beginning. We came into Q2 being negative tactically on the technology and real estate sectors which have so far proven to be correct as these two sectors are the two worst performing sectors this quarter. We also highlighted energy and financials as two sectors with a positive outlook. The energy is the only sector that is up this quarter.

Nvidia was the biggest drag on the S&P 500 Index negatively impacting the index four times more than the second worst contributor Meta. Nvidia shares were down exactly 10% taking the stock down to levels seen in late February. What made the move even more interesting was the fact that TSMC, the biggest chip manufacturer in the world, announced on Thursday a pretty optimistic outlook for AI chips expecting 50% annualised growth over the next five years.

Demand for AI chips remains strong and the outlook for Nvidia looks good, but equities are about changing expectations. As we have recently told clients Tesla plunge from its late 2021 high of more than 65% reflect forces that were not adequately priced in the valuation. The market back then priced Tesla for 25-30% global market share domination including sustaining higher operating margin than the industry. Two years later competition is eroding Tesla’s profit margin and demand has hit an air pocket.

A similar situation could happen to Nvidia. That in two years from now revenue and profits have doubled but the share price is down. The three biggest risks for Nvidia are increased competition, which we know is coming from many different directions, supply chain disruptions around Taiwan, and electricity production that cannot keep up with AI datacentre demand.
Nvidia share price | Source: Saxo

Must watch earnings this week: Tesla, Meta, Caterpillar, Microsoft, and Google

This week, the Q1 earnings season kicks into gear with the main question being whether earnings releases can break the negative sentiment in equities this month. The five most important earnings this week in terms of their expected market impact are listed below including the key things investors will focus on.

  1. Tesla (Tuesday, aft-mkt): Analysts expect first revenue decline since the pandemic and a significant EBITDA decline of 10% as multiple price cuts are eroding profitability. Tesla is losing its technology stamp in the equity market and Elon Musk will potentially hype the upcoming Robotaxi event on 8 August, but the move is risky as Musk has multiple times not delivered on key delivery targets. The higher for longer bond yields due to inflation are also not helping on either demand or input costs. Tesla recently laid off 10% of its global workforce.

  2. Meta (Wednesday, aft-mkt): Analysts expect another blowout quarter delivering 26% YoY revenue growth and 70% YoY growth in EBITDA as cost cutting and booming online ad market are expanding profit margins. Generative AI has improved ad targeting on its network, but the losses piling up in its Reality Labs segment may be the sour grape in Q1 as it could weigh down on free cash flow.

  3. Caterpillar (Thursday, 12:30 CET): Analysts expect -2.7% YoY revenue growth and -15% YoY growth in EBITDA as the global construction industry is facing mixed demand signals. Strong infrastructure spending and an elevated backlog are positives going into the Q1 earnings release while the more cyclical parts of the business related to mining and China are still weak. Energy and transportation might be a bright spot.

  4. Microsoft (Thursday, aft-mkt): Analysts expect 15% YoY revenue growth and 21% YoY growth in EBITDA as strong AI demand is fuelling its cloud business due to strong demand for Azure workloads. The adoption rate of its hyped Copilot feature in Office could be a must watch metric for investors.

  5. Alphabet (Thursday, aft-mkt): Analysts expect revenue growth of 14% YoY trailing Meta and 45% YoY growth in EBITDA driven by strong pricing in global online ad markets. Google’s cloud business should also be a key driver of Q1 results as we expect to see strong demand for generative AI workloads. YouTube performance has in previous quarters been another bright spot for investors and will likely attract attention again in Q1.

The list below highlights are the major earnings releases this week:

  • Monday: China Mobile, Verizon Communications, SAP

  • Tuesday: PepsiCo, Danaher, Visa, Tesla, Texas Instruments, Novartis, General Electric, Phillip Morris, Deutsche Boerse

  • Wednesday: Meta, IBM, ServiceNow, Thermo Fisher Scientific, DSV, Kone, Orange, Eni

  • Thursday: Kweichow Moutai, Airbus, AstraZeneca, Caterpillar, Union Pacific, Microsoft, Alphabet, T-Mobile, Intel, Merck & Co, Comcast, Neste, Sanofi, BNP Paribas, Dassault Systemes, STMicroelectronics, BASF, Deutsche Bank, Keyence

  • Friday: Chevron, Exxon Mobil, AbbVie, TotalEnergies


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