Thought of the day

The AI stock rally faces a key market test on Wednesday, when NVIDIA reports its quarterly earnings and outlook. Growing demand for the company's AI server chips has led to a USD 2.35tr market capitalization—making it the third-largest company globally after Microsoft and Apple.

Strong first-quarter earnings from big tech firms so far have raised investor expectations for AI growth. The Nasdaq hit fresh all-time highs this week, and specialist technology gauges like the SOXX and NYSE FANG+ indexes have rallied more than 20% year-to-date. At the same time, implied equity market volatility has been receding, with the CBOE’s VIX index (a measure of US stock volatility colloquially referred to as "Wall Street's fear gauge") standing at around 12, near its 2024 lows of around 11.81.

Without taking any single-name views, we see several implications for investors:

Tech equities have more room to run. US tech earnings so far have been among the strongest in the first-quarter reporting season, with revisions in the sector outpacing the rest of the market. However, earnings results also suggest a broadening market: Since March, tech companies excluding Microsoft, NVIDIA, and Apple have revised 2024 profit estimates up by 7%. This wider growth makes global tech valuations of a 24x price-to-earnings ratio for 2025 appear reasonable, in our view (based on MSCI AC World Information Technology Index data). We expect sustained earnings growth for AI-related companies in the years ahead, underpinned by solid AI capital expenditure and monetization progress.

Global semiconductors set for strong profit growth, as margins improve. The broader semiconductor industry is benefiting from sustained AI demand, with long lead times for best-in-class products, and from big tech companies reporting further increases to AI capital expenditure plans in recent earnings releases. AI computing should account for the bulk of this demand, in our view. We therefore expect global semis to deliver earnings growth of 50% this year and 25% in 2025—and we see potential for positive surprises to both these forecasts. Operating margins are improving too, with potential for them to reach 35% this year thanks to strong pricing power and operating efficiencies. We expect strong sustained demand for high-performance computing to be led by AI and cloud, as well as next-generation product launches.

“Edge” AI is expanding through consumer tech. Microsoft and its PC partners this week announced new ARM-based laptops with AI-enabled processing, opening the door to AI-powered voice assistants, real time translation, and generative AI features directly on consumers' own devices. Apple has announced a new AI-enhanced chip for its iPad line, while Intel says it will launch new AI-enabled laptop and desktop processors in the third and fourth quarters, respectively. New, smaller open-source models have shown success operating directly in consumer-level hardware. These new features may draw back consumers, hastening an anticipated troughing of end-markets like PCs and smartphones in the months ahead. We also think wider adoption of responsive, conversational audio AI in edge devices should accelerate the adoption of generative AI in industries such as healthcare, education, and services.

So, without taking any single-company views, we stay positive on the AI trend and maintain our preference for big tech given the advantageous market positions. We forecast global tech earnings growth of 20% and 16% this year and next, respectively, led by the semiconductor sector where we see investment opportunities. For investors looking for diversification within their US tech exposure, we also like Asian AI beneficiaries and the memory part of the market in light of lengthy AI-chip backorders.