Big Tech Comes Roaring Back in the First Half of 2023

July 6, 2023

Source: Bloomberg Source: Bloomberg

Amid sticky inflation, higher interest rates and calls for a recession, the Nasdaq 100 Index (NDX) just experienced its best semi-annual performance dating back to the 1999 dot-com bubble, as seen in the chart above. Mega-cap stocks (defined as market capitalizations greater than $200 billion) have added roughly $5 trillion in value over the first half of 2023 and continue to move higher as we head into the back half of the year.1

Amazingly, these stocks continue to increase in value even though they trade at expensive valuations. The table below shows the price-to-earnings (P/E) ratios for several of the highest-performing mega-cap companies in the NDX as of June 30. While other valuation metrics may be more appropriate for companies with higher growth rates, the numbers below are still impressive.

Source: Bloomberg

As a whole, the NDX trades at roughly 26 times estimated earnings, significantly above its 10-year average of 21 times. At some point, investors may deem these stocks to be too expensive. But in a market with so many uncertainties, earnings estimates moving lower, and bearish sentiment across Wall Street from many economists and market participants, both retail and institutional investors have flocked to these “safe haven” technology stocks regardless of how expensively they trade.

Although expensive, many of these businesses have unique competitive advantages, consistent top-line growth, durable margins, and operate in end markets that will continue to see strong demand for years to come. So I can see the appeal of owning many of these stocks even if investors have to pay up for them.

Furthermore, one of the biggest reasons why many investors have bought some of the names mentioned above can be attributed to the role that artificial intelligence (AI) will play in the years ahead. Following the release of ChatGPT in November 2022, investors have sought out businesses that could benefit from this emerging technology, such as these mega-cap tech companies as well as chip manufacturers, which have seen overwhelming demand for their products.

It would be difficult to talk about AI without mentioning NVIDIA, which is up almost 200% year-to-date. NVIDIA designs, develops and markets graphics processors and related software, which have wide-reaching implications across scientific computing, autonomous vehicles, robotics, internet applications and, of course, AI. One example of the type of demand NVIDIA has seen and expects to see ahead is the company’s forward earnings estimates, as seen below.

Source: Bloomberg

In terms of adjusted earnings per share (EPS), NVIDIA has never made more than $1.36 in a quarter prior to 2024. But as seen in the table above, consensus estimates now expect NVIDIA to earn more than $2.00 per share for Q2, Q3 and Q4 2024E in addition to growing its fiscal year EPS by more than 100% year-over-year.

The market is obviously expecting demand to persist, and some investors believe that these estimates may still be somewhat conservative based on the wide-ranging implications AI could have across other industries such as healthcare, supply-chain manufacturing, cybersecurity and logistics. In addition, AI could turn out to be a boon to margins moving forward as it proves effective at eliminating various costs and making many of these companies more fiscally efficient.

Management teams across almost all sectors have started to incorporate AI into how they communicate with the market and investors as well. Through May 4, there had been 1,072 mentions of AI in earnings calls from companies in the S&P 500, including Expedia Group, Moderna and Kraft Heinz, with roughly 20% of the index still left to report at that time.2

Many of these companies and management teams are exploring how they can utilize AI and take advantage of the many different use cases it presents. According to Goldman Sachs strategists, AI has the potential to boost net margins by roughly 400 basis points over the next decade, although there is still a high amount of uncertainty around the overall impact that AI could have broadly.3

So what can we expect for the latter half of 2023? Given that there is widespread uncertainty regarding inflation expectations, limited line of sight to improvements in earnings forecasts in some sectors, and generally a more difficult economic environment for businesses and consumers due to higher rates, I expect these mega-cap stocks to continue to perform well and see a consistent bid given their size and positioning in their respective markets.

Furthermore, I expect AI to act as a catalyst that will drive incremental growth and margin expansion moving forward. However, it will be interesting to see how the market comes around to more thoughtfully considering valuation versus buying some of these names based purely on momentum.

Key Takeaway

In a market with so many unknowns, investors have flocked to mega-cap technology stocks as a “safe haven,” with little regard for price or valuation. In addition, there is significant investor interest in the role that AI is playing in the world today, and how this technology could positively impact the profits and business models of these large tech companies.

While it is difficult to predict how the market will perform over the next six months, we intend to focus on finding situations that provide value while minimizing risk. Continuing to look for businesses with strong balance sheets, defensible moats, skilled management teams and healthy margins of safety will be top of mind as we navigate this volatile market in search of consistent and relative outperformance.



1 Tech Stocks on Fire: Apple Is Worth $3 Trillion - Bloomberg

2 AI Is the Hot Topic on Earnings Calls This Quarter - Bloomberg

3 Goldman Strategists See Potential Profit Boom From AI - Bloomberg

Tags: Markets | Safe havens | Technology | Investing | Artificial Intelligence | Valuation

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