New Forecast: Big Tech Earnings Growth to Plummet by 77%

After riling up the stock market in recent months, big tech giants are looking at potential declines in their earnings growth in the forthcoming years. According to Stocklytics.com, annual EPS growth for big tech, Microsoft, Nvidia, Amazon, Google, and Meta will fall by an astounding 77% by the end of fiscal 2026, hinting at a slugged growth rate for these big-lead tech firms.

Edith Reads, a financial analyst at Stocklytics.com, explains:

The imposing threat of more trade restrictions on chipmakers, coupled with growing skepticism about the lasting impact of the AI hype, has contributed to the substantial downturn in expected earnings growth for tech giants.

Stocklytics Financial analyst, Edith Reads

Earning Growth for Big Techs

At the end of 2023, big techs boasted an impressive 57% average EPS growth, significantly boosting the overall S&P 500 EPS growth to 4%. However, as AI momentum cools, these tech giants face a slowdown.

By the end of 2024, Google, Microsoft, Amazon, Meta, and Nvidia will likely achieve a median EPS growth of 37%, reflecting a 35% drop from the previous year. Analysts expect this trend of diminishing growth to continue, with EPS growth projected to fall to 19% in 2025 and 13% in 2026, raising concerns for these multi-billion-dollar tech corporations.

In contrast, the rest of the S&P 500 companies are emerging from an earnings recession, with overall S&P 500 EPS growth set to rise to 9% by 2026. This is a 125% increase from 2023. Companies in real estate, homebuilding, and regional banking within the S&P 500 are set to lead in earnings growth, overshadowing the big techs.

The BofA US Equity & Quant Strategy team comments, “Given the strong correlation between tech’s stock outperformance and earnings, we expect the narrowing growth differential to catalyze a broader market expansion.”

As of July 20 this year, some tech giants have experienced notable stock declines, with AI chipmaker Nvidia Corp. falling 8.8% and Amazon.com Inc. dropping 5.8%.

Market Dynamics Shift Amid Fed Interest Rate Cuts

The Federal Reserve interest-rate cuts have caused a violent shift in market winnings. While major tech stocks have suffered, other sectors have seen a substantial uptick in earnings performance, with lower-priced stocks benefitting from these cuts.

BofA comments, “We see the beginning of a strong broadening in the market’s strength. The other 493 S&P 500 companies are set to report their first profit increases since 2022.”

The Federal Reserve will decide on interest rates on July 31, and most analysts expect no changes then. Instead, many anticipate action during the September 18 meeting. However, an unexpected early cut could fuel this bullish rally if upcoming retail sales and job data show further slowing growth.

Additionally, BofA strategists have pointed out that an increase in layoffs outside the tech sector suggests further cost-cutting measures, which could enhance profit margins for non-Magnificent Seven stocks throughout this year and into 2025.