The tech sector continues to lead public markets, with major players like Nvidia, Meta, and the remainder of the Magnificent Seven significantly contributing to the S&P 500’s surge this year. This industry alone has added over $5.1 trillion in market value, representing about 42% of the S&P 500’s total market cap growth during FY2023.
As the third-quarter earnings season approaches, the tide may be shifting. Analysts have lowered expectations for S&P 500 earnings growth to a modest 4.3% YoY, down from 7% projected in mid-July. This slowdown would mark the weakest performance in four consecutive quarters. Investors are therefore closely monitoring how tech giants handle the current financial landscape. Concerns over the Federal Reserve's interest rates, global instability, shifting consumer behaviour, and the upcoming elections have amplified the stakes. A drop in demand, spending delays, or operational challenges could hinder the market’s performance. On the flip side, beating Wall Street's estimates may help sustain market momentum for a strong year-end.
You’d have to be living under a rock not to know about Nvidia’s meteoric rise. The company reached a $3.31 trillion market capitalization, surpassing Microsoft to become the second-largest, trailing only Apple. Nvidia’s stock has soared 200% over the past year, driven by its central role in the AI boom. Let’s take a step back to understand how Nvidia got here. Founded in 1993 by Jensen Huang, Nvidia focused on producing graphics processing units (GPUs) instead of central processing units (CPUs), unlike rivals Intel and AMD. This specialization gave Nvidia a competitive edge in video games, where GPUs excel at rendering graphics-intensive tasks. With GPUs being more energy-efficient and superior at handling calculations, Nvidia capitalized on the AI revolution, as large AI models increasingly required its technology. The 2023 release of ChatGPT further fueled this trend, driving demand for AI investments globally. As a result, Nvidia became a key player in the field.
Looking ahead, Nvidia's growth potential remains promising. Analysts forecast a compound annual growth rate of nearly 33% in revenue through 2026. However, much of this optimism is already priced into the stock, heightening the stakes for the upcoming earnings report. As the third-quarter earnings season unfolds, the market is keen to see if Nvidia’s heavy investments in AI will translate into sustainable margins and profitability. A shortfall in expectations could lead to stock volatility, underscoring the importance of flawless execution in this rapidly evolving sector.
Tech giants such as Nvidia, Alphabet, and Microsoft are facing challenges that may impact growth in the coming quarters. According to Bain & Company, AI workloads are expected to grow by 25% to 35% annually through 2027, potentially leading to another global chip shortage. Nvidia, a critical AI hardware supplier, is already confronting supply chain constraints, particularly with GPU chips. Geopolitical tensions between China and the US have exacerbated this situation, as countries like the US, the Netherlands, and Japan have imposed export controls on semiconductors sold to China.
Additionally, Nvidia’s major customers, including Microsoft, Google, and Amazon, which together account for 40% of Nvidia's revenue, are exploring alternatives. They are developing their own chips and sourcing AI products from Nvidia's competitors. Amazon, for instance, introduced its own AI-oriented chips in 2018, offering them through AWS. Microsoft has also pursued partnerships with other suppliers, including buying AMD's GPUs to power its AI-driven Copilot models. This trend of in-house development by major clients and competition from traditional rivals increases the risk to Nvidia’s future market share in AI hardware.
The upcoming earnings announcements present a critical test for tech giants like Nvidia, Microsoft, and Alphabet. With the tech sector having driven much of the market's growth this year, these companies are under immense pressure to meet expectations in the face of economic uncertainty and supply chain disruption. Nvidia, in particular, finds itself at the center of the AI revolution, but its future success will depend on how well it is able to sail through the challenges like chip shortages and the increasing shift toward in-house development by its key clients. As the market looks for guidance on whether the tech sector can maintain its momentum or face a slowdown, these earnings reports should be able to provide a bit of clarity in terms of both individual companies and the broader market.
Equity Research Team