Strong earnings growth to sustain tech’s stock market leadership
In the first half of 2024, gains in the US stock market were primarily driven by the tech sector. The equal-weight S&P 500 index delivered only one-third of the returns of the market-cap-weighted S&P 500 index, which is heavily influenced by tech giants such as Apple, Nvidia and Microsoft. In the second half of the year, however, both indices posted comparable gains, suggesting that the market rally had begun to expand beyond the tech sector.
Figure 1: S&P 500 rally has broadened beyond tech
Figure 2: Earnings growth of tech-related sectors to remain robust in the coming years
AI is driving revenue growth and cutting costs for Big Tech
Figure 3: AI demand is driving cloud revenue growth in Big Tech
Big Tech’s heavy capex is justified
Figure 4: We expect the surge in capital expenditures to continue
Figure 5: People tend to underestimate the long-term effects of new technologies
Source: Morgan Stanley AI Guidebook: Fourth Edition, 23 January 2024; Capital Group
Figure 6: Big Tech’s capex-sales ratio remains healthy
Big Tech remains our top pick
Figure 7: Big Tech companies are cash rich, with healthy debt levels
Tech valuations are still looking attractive
Table 1: Projections for the Nasdaq CTA Internet Total Return Index
|
NETX Index |
2023 |
2024E |
2025E |
2026E |
|
Earnings Per Share (EPS) |
33.11 |
48.25 |
54.74 |
63.60 |
|
Earnings Growth YoY |
76.85% |
45.73% |
13.45% |
16.19% |
|
PE Ratio (X) |
33.84 |
30.81 |
27.16 |
23.38 |
|
Upside Potential (based on a fair PE Ratio of 30X) |
- |
- |
- |
28.3% |
|
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 22 January 2025 |
||||
Figure 8: Share prices are driven by earnings growth in the long run
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