Profit Growth of Big Six Tech Companies Expected to “Collapse” by 2024

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UBS Global Research strategists have forecasted a significant slowdown in profit growth momentum for the so-called Big Six technology stocks over the next few quarters. They downgraded their rating on these mega-cap companies, citing challenging comparisons and cyclical forces.

The earnings per share (EPS) growth of the “Big 6 TECH+” stocks, including Apple, Amazon.com, Alphabet, Meta, Microsoft, and Nvidia, is projected to decline to 15.5% by the first quarter of 2025. This is a significant drop from the 42.2% estimated for the same period this year, according to strategists led by Jonathan Golub.

“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,” Golub said.

In contrast, UBS expects other tech stocks to perform better, with forecasted EPS gains of nearly 26% by the first quarter of 2025, up from the projected 11.1% for the same period in 2024. These companies did not experience the same level of growth during the COVID-19 boom as the mega-cap stocks.

The Big Six companies, which are considered bellwethers for the tech sector and for the performance of the S&P 500, are set to report quarterly results over the next two weeks.

Factors such as rising bond yields, stronger-than-expected recent U.S. economic data, and uncertainty surrounding the Federal Reserve’s interest rate cut outlook have also contributed to the pressure on these high-valuation stocks.

According to UBS, the earnings momentum of the Big Six has experienced four distinct cyclical waves, starting with the COVID-19 pandemic driving consumer demand for personal computers (PCs), online shopping, and social media.

After the pandemic subsided and the economy reopened, profits suffered due to waning demand for tech products, leading to EPS growth contraction in 2022. The profit upsurge in 2023 was a result of easier comparables and a reduction in expenses for companies.

“Earnings are projected to quickly renormalize in mega-cap tech, following a sharp decline in profit growth from 4Q23-3Q24,” Golub said.

Currently, the Big Six firms are trading at forward 12-month price-to-earnings (PE) ratios ranging from 21.6 to 39 times, while the benchmark S&P 500 index trades at about 25 times.

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