Investors had ample reasons to be concerned about the prospects of tech giants this earnings season. However, they opted to adhere to a strategy that has proven successful throughout the year—favoring investment in the largest stocks.
This buying frenzy facilitated a dramatic turnaround for the Nasdaq 100 Stock Index, transitioning from correction territory to a 15-month high within just three weeks, contributing approximately $2 trillion in market value along the way.
Despite less-than-encouraging outlooks from industry leaders such as Apple and Meta Platforms Inc., which overshadowed larger-than-expected third-quarter profits from certain major tech firms, investors remain optimistic about the final six weeks of the year. They are pinning their hopes on tech behemoths like Microsoft Corp. and Apple Inc. to lead the market, notwithstanding concerns about stretched valuations.
“There continues to be a divergence between the magnificent 7 and the rest of the market,” remarked Jason Benowitz, senior portfolio manager at CI Roosevelt. “There’s definitely a question as to whether or not there will be a catch up and how it would occur. As to what the trigger for that might be, I’m not concerned about that happening in the near term.”
Despite concerns over the ability to replicate such performances, investors are undeterred, buoyed by indications that the Federal Reserve may halt interest rate hikes and by the positive impact of artificial intelligence services on the financial performance of companies beyond Nvidia Corp.
For instance, Microsoft's cloud-computing business experienced a revenue boost in the quarter from customers using products from OpenAI, the owner of ChatGPT. This development propelled the software giant's stock to a record level, approaching a $3 trillion market value.
While rising profit estimates have helped mitigate stock valuations, they still remain elevated. The Nasdaq 100, priced at 24 times projected profits, down from its 2023 high of 27 times in July, reflects this scenario. Both Microsoft and Amazon are valued at more than 30 times profits, and Apple is trading at 28.
However, doubts persist about the sustainability of the recent rally, with the Nasdaq 100 signaling a technical warning as its relative strength index approaches the overbought level—an indicator of a potential correction in the near future.
All eyes are now on Nvidia, with its quarterly earnings due after markets close on Tuesday. While Wall Street anticipates another strong report due to robust demand for its chips in AI computing, there's also a risk of disappointment given the elevated expectations.
Susquehanna analyst Christopher Rolland highlighted the high expectations for Nvidia, stating, “The bar is very high… We expect nothing short of another strong quarter for Nvidia, but think investors are already expecting this.”
Nevertheless, the promising earnings growth of Big Tech seems to outweigh concerns about valuations, according to Anastasia Amoroso, chief investment strategist at iCapital. She specifically mentioned Nvidia, whose over 200% surge this year makes it the top performer on the Nasdaq 100.
“Maybe 40 times forward earnings on Nvidia—maybe that seems expensive,” she noted. “But when you expand the chart, it is actually not off the chart, so to speak. Everything is relative.”
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