Experts at FOREX.com say the Big Tech valuation gap could narrow in H2 2023.
The first half of 2023 saw tech stocks taking the spotlight, with Apple, Amazon, Meta, Microsoft and Tesla outperforming the wider market and proving themselves as the propellant pushing both indices to their highest level in more than a year.
Experts at FOREX.com took a deep dive into what stats for the second half of 2023 could show.
Here’s what they expect:
The role of AI
AI has emerged as a defining technology in the big tech sector. Unlike some previous trends (Metaverse to NFTs) that generated hype but had limited applications in the real world, AI is here to stay with practical and tangible solutions. While its trajectory may be a bit of a roller coaster for traders as initial winners pull back and new entrants rise, it presents long term investment opportunities.
FOREX.com AI Market Expert Matt Weller, said: “Big tech’s influence on the financial markets is expected to remain strong in the second half of 2023. Investors are advised to stay vigilant and adapt to ever changing dynamics. Tech stocks typically outperform in good economic conditions but face challenges during downturns, and this trend is likely to continue.
Tech stocks revival continues
Big tech companies saw a strong revival in the first half of the year, with Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA and Tesla leading the way.
Their performance propelled both the Nasdaq 100 and the S&P 500 to new heights, reflecting the tech sector’s ability to adapt in uncertain times.
FOREX.com analysis, however, shows that progressing into the final quarter, they face the test of maintaining and sustaining growth.
The diversity in valuations among these tech giants will likely narrow, creating opportunities for long term investors and traders.
Tech valuations have tempered during the pullback seen since the start of August, with the price-to-earnings ratio of the Nasdaq 100 declining from over 30 in July and closer toward 25.
All seven companies have seen their valuation multiples Drop over the past three months, with those with the highest ratios like NVIDIA and Tesla underperforming and experiencing the sharpest declines – and the wide range among the group has narrowed.
Some stocks, such as NVIDIA, have seen their multiples return to more normal levels but some still look expensive when considering the troublesome outlook and their historic averages, like Tesla.
Apple and Meta were both trading at higher than usual valuations heading into this earnings season but are now trading below their 5-year average.
All-in-all, the range of valuations in the group has narrowed in recent months but remains wide, suggesting there are still some offering attractive multiples and others that still have room to come down further.
Earnings Expectations
The expectations for earnings growth in the tech sector varies among companies. Amazon and NVIDIA, who are known for high valuations, are expected to deliver strong growth, while Apple and Microsoft exhibit more cautious forecasts. Alphabet and Meta fall in between, with potential for higher valuations in the latter half of the year. These differing outlooks are reflective of the challenges and opportunities present in the ever-changing tech landscape.
FOREX.com analysis says results out from Tesla, Microsoft, Alphabet, Meta and Amazon so far present a mixed bag with the group generally beating expectations but tempered by a more cautious outlook given the high level of economic and geopolitical uncertainty lingering over the horizon.
FOREX.com says Microsoft and Amazon both impressed thanks to their diverse business models and cloud-computing arms that are positioned to benefit from AI.
But Meta and Alphabet disappointed as markets fret over the outlook for advertising in 2024 and their ability to capitalise on new technology – while Tesla is being hurt by a combination of slower growth and tighter margins.
As for those yet to come, FOREX.com sees the bar looking far lower for NVIDIA than a few months ago, which bodes well for Wall Street’s favorite AI stock, while the jury is out ahead of Apple’s update as concerns grow about demand for the iPhone 15 and other hardware.
Joshua Warner, FOREX.com Market Analyst said: “There are reasons to be cautiously upbeat about Big Tech as we head into the final quarter of the year, but markets are becoming increasingly pessimistic about what lies around the corner in 2024 as higher-for-longer interest rates, persistent inflation and a strong but weakening economy all play out.
“The bears have made their presence known in recent months but still have more work to do before they push the bulls out entirely. The landscape for equities has become murkier, visibility is more limited and there are attractive opportunities elsewhere now that treasury yields have spiked to 16-year highs.
The valuation gap among the group of seven Big Tech members means there are challenges and opportunities ahead. Those with the lowest multiples that trade at a discount will become the most attractive when conditions finally improve, while some may have a tougher time justifying their valuations as the outlook becomes increasingly challenging.”
