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Upbeat Tech Earnings Forecast: Why Analysts Expect Investor Confidence to Soar

Upbeat Earnings Forecasts Expected to Offset Tech Sector Concerns

The earnings season for technology companies is set to begin this week, and market professionals anticipate an overall positive outlook. Despite recent drops triggered by the emergence of Chinese AI company DeepSeek, analysts predict that strong earnings will bolster investor sentiment and push the market higher. Below are five key takeaways from respected strategists and mutual-fund managers regarding this optimistic earnings season.

1. Strong Earnings Will Uplift Investor Sentiment

One of the primary concerns for investors is whether major tech companies, often referred to as the “Magnificent Seven,” will produce disappointing results that could drag the market down. “If the Magnificent Seven disappoint, they could drag the S&P 500 SPX down significantly since they account for a whopping 30.5% of the market cap of the index,” said Ed Yardeni of Yardeni Research. These companies also comprise a substantial 21.6% of the S&P 500’s forward earnings. Fortunately, early reports indicate that earnings for tech firms will likely be solid. Portfolio manager Dan Fletcher, from the DWS Science and Technology Fund, noted that recent earnings from companies like Netflix Inc. (NFLX) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) exceeded expectations, suggesting a strong start to the earnings season.

2. Hyperscalers Will Showcase Continued AI Spending Growth

Notably, the hyperscaler companies are likely to illustrate that their investments in AI technology remain robust. At the recent Consumer Electronics Show, Nvidia Corp. (NVDA) asserted that hyperscalers are not curtailing their capital expenditures on AI. Sean Sun, portfolio manager at Thornburg International Growth Fund, noted that Taiwan Semiconductor anticipates a remarkable 45% compound annual growth in AI chip sales over the next five years. As earnings reports from industry giants such as Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), and Apple Inc. (AAPL) roll in, analysts expect clarity on AI spending patterns. Despite the cost advantages claimed by DeepSeek, experts believe that these companies will maintain their projected spending levels on AI technologies.

3. Rising Earnings Opinions Challenge Bubble Theories

Critics often argue that stocks of large tech companies are in a bubble, drawing parallels to speculative behavior seen during the late 1990s. However, the team at William Blair counters this notion. They noted that since late 2019, the forward price-to-earnings (P/E) ratios for the leading tech firms have risen by approximately 20%, while the median returns for these stocks have soared nearly 200%. This trend suggests that the growth in equity returns is due to actual earnings growth and not mere speculation. Fletcher of DWS points out that tech leaders are well-positioned to continue enhancing their earnings estimates, contributing further to their valuations without excessive speculation.

4. Increased CEO Confidence May Drive Economic Growth

Analysts are beginning to detect a rise in CEO confidence this earnings season, which is expected to positively affect overall investor sentiment. Erik Swords, head of global technology at Voya Investment Management, references supportive commentary from executives at companies like Accenture (ACN), JPMorgan Chase & Co. (JPM), Salesforce Inc. (CRM), and ServiceNow Inc. (NOW). High CEO confidence often translates into increased budgets, fostering a greater likelihood of mergers and acquisitions and supporting overall economic and market growth. “It is indisputable that it is a pro-growth environment,” Fletcher shared, emphasizing the positive IT spending backdrop.

5. Signs of Recovery for Non-AI Chip Stocks

Historically, non-AI chip stocks have faced challenges due to sluggish demand from automotive and other sectors. However, promising signs are emerging. Companies such as Texas Instruments Inc. (TXN), Infineon Technologies AG (IFNNY), NXP Semiconductors N.V. (NXPI), and STMicroelectronics N.V. (STM) have faced headwinds due to accumulated inventories. Yet, Taiwan Semiconductor reports a mild recovery in its non-AI chip business, indicating that even small improvements in this segment could be crucial. Sun believes that downturns typically last a couple of years, and he perceives the current cycle as nearing an end, which would be positive for chip companies as the market adjusts.

In summary, the forthcoming earnings reports from tech companies are anticipated to offer a wealth of positive insights, dispelling fears of a downturn while confirming the growing importance of AI investments and the upcoming confidence among executives.