Monday, December 16, 2024

As big tech profit growth slows, investors hunt for a new thing

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(Bloomberg) — The stock market’s growth engine is running on fumes.

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For years, investors have counted on the biggest technology companies to power equity indexes higher based on their strong earnings and expectations for even more profits in the future, most recently fueled by the development of artificial intelligence services. Those days appear to be over, at least for now. And it’s forcing investors to think of other ways to play the latest equities bull market as it enters its third year.

The issue is profits. The Magnificent Seven tech giants — Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — are expected to post a combined earnings increase of 18% in 2025, down from a projected 34% for 2024, according to data compiled by Bloomberg Intelligence. Strip out Nvidia, arguably the biggest beneficiary of Wall Street’s AI mania, the rest of the group is expected to post a measly 3% increase in profits in 2025.

An 18% profit expansion is good news for just about any sector — but Big Tech. Should the estimate come to fruition, the high-flying cohort will fall behind health care in full-year earnings growth and not significantly above the materials and industrials groups.

Meanwhile, the S&P 500 Index’s earnings growth is projected to reach 13% in 2025, up from 10% this year. In other words, the tech giants are no longer setting the pace for Corporate America.

“The Mag Seven is not necessarily going to be the engine of growth for the market that it has been for the last year or so,” said Julian McManus, portfolio manager at Janus Henderson.

Investors are already responding. In the week through Dec. 4, the information technology group had its largest outflow in six weeks at $1.4 billion, according a Bank of America note on Friday citing data from EPFR Global. Small-cap stocks, which have been trailing the broader market this year, had $4.6 billion of inflows, putting them at an annualized record high of more than $30 billion.

McManus said he’s watching for upside surprises in free cash flow growth and sees alternatives to Big Tech all over the world, not just in the US, where he’s “significantly underweight.” He likes energy producers, which are benefiting from power-thirsty data centers and are a popular play, and sees opportunities in biotech as well as chip design software companies like Cadence Design Systems Inc.

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