Monday’s swift sell-off in the markets serves as a reminder for not only what’s been the driving force of the bull market thus far, but also what investors have been expecting to come in 2025. It’s all about big tech earnings.
New developments from Chinese artificial intelligence DeepSeek sparked the rout as investor concerns over brewing competition in the AI space for Nvidia (NVDA) and other big tech names prompted pause in the US AI trade.
Nvidia stock dropped more than than 11%. Meanwhile fellow “Magnificent Seven” members Microsoft (MSFT), Alphabet (GOOGL,GOOG), Meta (META), Amazon (AMZN) and Tesla (TSLA) were all off 2% or more in early trading. Broadcom (AVGO), another large player in the AI space, was down more than 12%.
“When expectations are high, one skeptical headline can knock the market off its axis,” Ritholtz Wealth Management chief investment strategist Callie Cox wrote in a note on Monday. “That’s exactly what we’re seeing today.”
A slowdown in Big tech’s rapid earnings growth has been a risk to the market that strategists have been talking about for more than a year. With with index valuations near multi-decade highs and the 10 largest stocks comprising nearly 40% of the S&P 500, strategists have argued the rapid rally in stocks is increasingly on thin ice.
But unlike other risks like higher interest rates or sticky inflation, there hasn’t been a clear story for why the exceptional Big Tech earnings growth story would collapse. For now, this weekend’s DeepSeek AI model launch appears to be a tangible reason for investors to question whether the high earnings expectations will truly follow through.
In 2024, Magnificent Seven earnings outperformed the rest of the S&P 500 index by 30 percentage points, per research from Goldman Sachs. And while that margin is expected to slow in the year ahead, causing some to call for a broadening out of stock market returns, big tech earnings growth remains a key pillar of the bull market thesis.
The “Magnificent Seven” stocks are expected to grow earnings by 21.7% in the fourth quarter compared to the 9.7% earnings growth projected for the other 493 tech stocks. The year-over-year growth rate for the “Magnificent Seven” is expected to slow in the first quarter, before accelerating once more to year-over-year earnings growth of more than 24% in the third quarter.
As Venu Krishna, head of US equity strategy at Barclays, pointed out in his 2025 outlook, given the large earnings growth expected for Big Tech throughout the year, the group is “likely to remain as critical of an EPS growth driver for the S&P 500 as the group was [in 2024].”
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