Overall, the reports showed some mixed trends. So far, the share price reaction to the results has been muted. The Nasdaq Composite was up 2%last week, and down 0.6% in the prior week—both relatively modest moves compared to the past few months.
Investors’ expectations for global tech have been improving, given the sector’s relatively demanding 26 times forward price-to-earnings valuation and 25–30% returns heading into the reporting season. Most companies also highlighted that earnings growth trends are now bottoming. This is consistent with our previous view for tech earnings to be down only mid-single digits year-over-year versus a low-teen decline during the previous quarter.
We continue to expect global tech earnings growth to turn more positive in the second half and potentially grow by low teens next year. Given the strong year-to-date performance and elevated valuations in global tech, we expect volatility in tech stocks to remain elevated in the near term. We advise investors to use structured strategies that take advantage of rising volatility. We also see opportunities in tech laggards and mid-cyclical industries like software and internet.
While more tech companies are expected to report earnings in the next few weeks, we see several key trends from the results season so far:
Stabilizing fundamentals for the semiconductor industry are offset by premium valuations. Semiconductor results have been mixed overall and some industry leaders experienced profit-taking by investors following the results announcements. While AI has been a bright spot, spending trends in other segments have been muted. Inventory levels remain elevated despite ongoing digestion, whereas memory pricing is taking time to recover as consumer electronics demand in emerging markets remain sluggish near-term. On the flipside, most semiconductor companies expect revenue growth for the industry to turn positive in 2024, and the stage is set for a potential double-digit revenue growth rebound. However, given that these companies globally are now trading one standard deviation above their historical average, we think the positives for the semiconductor industry have mostly been priced in.
Software industry should be supported by steady growth in cloud computing. Software has been a bright spot for the sector, with double-digit revenue growth. However, a slowing margin improvement trend and restructuring efforts pose challenges. In our view, we think these trends are understandable, given a renewed focus on growth and increased investments to fuel medium- to long-term growth prospects. We think growth-based investors can use any potential near-term volatility in high quality software stocks to accumulate long-term exposure, given our view that the industry is a clear beneficiary of broadening AI demand.
Accelerating advertising growth should support the mid-cyclical internet industry. While the majority of internet companies have yet to report, results from the digital advertising segment so far suggest that advertising industry fundamentals have bottomed. We expect a gradual recovery for advertising earnings from here and think this should support the internet industry. While we believe the overall internet industry may not return to growth rates of over 20% as seen during the pandemic anytime soon, we do see internet as another mid-cyclical beneficiary along with software, based on our tech playbook. Valuations for the internet industry also look reasonable as reflected by the discount to its long-term average.
Fundamentals should stay weak for hardware and services industry. Overall results from the hardware and services industries have been challenging so far. While personal computer shipments came in better-than-expected in the first half of 2023, smartphone shipments are still down, and the segment’s prospects remain challenging. Unless we see major innovation, overall industry fundamentals will likely stay weak, even in 2024. Weak guidance from IT services companies is a concern, while services companies may also face mounting threats from the generative AI industry beyond the near-term.
The upcoming earnings reports from the other half of tech companies should set the tone for near-term performance of global tech companies. As we await these results, we expect volatility in tech stocks to stay elevated in August, given the strong year-to-date performance of the tech sector, coupled with its demanding valuations. In such an environment, we think structured strategies that take advantage of rising volatility can provide good and diversified options for investors. We also recommend investors to stay selective in AI stocks and see opportunities in tech laggards and mid-cyclical industries such as the software and internet segment.
For more on the good, the bad, and the ugly from the global tech earnings season thus far, please see our latest report, TechGPT: The good, the bad and the ugly from the global tech reporting season (28 July).
Main contributors - Solita Marcelli, Mark Haefele, Sundeep Gantori, Delwin Kurnia Limas, Bennett Chu, William Choo, Christopher Swann
Original report - Expect further volatility in tech stocks, 31 July 2023.