The long party in tech stocks is not over yet

As far as Wall Street is concerned, Big Tech is most definitely back. Investors who decided in 2022 that the long party in tech stocks was over have come around with remarkable speed this year to an appreciation of the more resilient qualities of the sector’s strongest companies.

There is a touch of the glass-half-full about this: the short-term picture has not changed and the five biggest consumer technology and cloud computing companies — Alphabet, Amazon, Apple, Meta and Microsoft — will struggle to report much growth at all this year.

But the stock price revival has been sparked by a sense that last year’s correction went too far, that the biggest tech companies have the financial strength to ride out a downturn better than most, and that some the secular growth trends that underpinned the long expansion are still intact.

After a year in which the five Big Tech companies lost 37 per cent of their value, the scale of the rebound has been notable. Their combined market cap has jumped 25 per cent since the start of 2023, at a time when the S&P 500 index is up only 7 per cent. That’s a cool $1.5tn in stock market gains, and a solid recovery after $3.6tn was wiped off last year.

A more stable, if still difficult, macro outlook has helped underpin this. The coming earnings season will be watched anxiously for signs of further weakening in IT demand. But worries about a sharper economic slowdown have eased.

These hopes have gone beyond Big Tech. Chip stocks have experienced a strong rebound as excessive inventory burns off and investors look ahead to a better second half of the year. With the semiconductor sector still scraping along the bottom and earnings projections unchanged, it may be hard to sustain a rally that has already seen the Philadelphia semiconductor index jump 43 per cent from the low it hit six months ago.

Meanwhile, concerns about the depth of tech’s pandemic hangover — as some types of digital spending have fallen back to pre-Covid-19 levels — have started to fade. By later this year, the boom years will be receding into the rear-view mirror and year-on-year comparisons will look more flattering.

That, in turn, could reinforce confidence that some of the most important secular growth trends remain intact. That is particularly true of cloud computing, where growth has slowed as customers have looked for ways to buy services more efficiently. Microsoft chief executive Satya Nadella has described this as a temporary phenomenon, as customers work out how to better manage the new cloud projects they signed up for during the pandemic. By the end of this year, in his view, the digestion of the last round of cloud spending will have run its course and stronger growth will be kicking in again.

The mania that has broken out around generative AI has given an extra boost to the growth projections for the cloud. Customers are looking to make more use of their own corporate data, in order to hone large language models such as OpenAI’s GPT-4 for their own business purposes.

All of this has raised hopes that a new growth phase lies ahead for Big Tech. Growth may be screeching nearly to a halt this year, but investors are already looking past this.

According to Wall Street analysts, Big Tech’s revenue growth, which jumped to 28 per cent in 2021, will slow all the way to 4 per cent this year. But they project it will rebound to 11 per cent in 2024 — a return to the double-digit growth that characterised the long and steady expansion that preceded the pandemic’s more recent boom and bust.

Expectations have also been rising when it comes to profits. The hurried round of job cuts pushed through by Big Tech late last year were initially seen as an admission of management failure. After hiring at a breakneck pace until well into the third quarter, some companies appeared to be responding far too late to a downturn that arrived earlier.

The cost-cutting has since come to be viewed more positively. Most notably, Meta’s tactical reversal since late last year, which involved cutting back its excessive spending on the metaverse and focusing on profits, has caused its stock price to more than double.

History suggests that, when the next big growth opportunity comes around, Big Tech’s cost disciplines will be thrown to the wind. But for now, its solid earnings prospects in an uncertain climate are a reason for optimism.