UBS Global Research strategists have issued a warning that the profit growth momentum of the prominent Big Six technology stocks could drastically slow in the coming quarters.
These technology giants, which include Apple, Amazon, Alphabet, Meta, Microsoft, and Nvidia, are anticipated to see a sharp decline in earnings per share (EPS) growth—from an estimated 42.2% in the current period to just 15.5% by the first quarter of 2025.
Jonathan Golub, leading the team of strategists, explained the rationale behind UBS’s decision to downgrade these stocks from ‘Overweight’ to ‘Neutral’.
“Our downgrade of the Big Six – from ‘Overweight’ to ‘Neutral’ – is not predicated on extended valuations, or doubts about artificial intelligence.
“Rather, it is an acknowledgement of the difficult comps and cyclical forces weighing on these stocks,” said Golub.
This adjustment comes amid broader financial conditions that have affected high-valuation stocks, such as rising bond yields and uncertainty surrounding the Federal Reserve’s interest rate decisions, influenced by recent U.S. economic data that has been hotter than expected.
The strategists also highlighted that these major tech companies, often seen as indicators for the tech sector’s overall health and the S&P 500’s performance, are due to report their quarterly results soon.
They noted that these firms are trading at a forward 12-month price-to-earnings (PE) ratio ranging between 21.6 and 39, compared to the S&P 500 index’s average of about 25.
Interestingly, UBS projects a more favorable outlook for other tech stocks which did not benefit as much from the COVID-driven demand surge.
These stocks are forecasted to see nearly 26% EPS growth by the first quarter of 2025, up from 11.1% in the same period of 2024.
The report also outlined the cyclical waves that have impacted the earnings momentum of the Big Six, starting with the initial boost during the COVID-19 pandemic that fueled demand for personal computers, online shopping, and social media.
However, as the pandemic eased and the economy reopened, the demand for tech products dropped, leading to a contraction in EPS growth in 2022.
A rebound occurred in 2023 due to easier comparables and reduced expenses.
“Earnings are projected to quickly renormalize in mega-cap tech, following a sharp decline in profit growth from 4Q23-3Q24,” Golub added, signaling a period of recalibration for these tech behemoths as they navigate shifting market dynamics and cyclical challenges.