The Lex Newsletter: tech’s magnificent seven ride to the rescue 

Receive free Big tech updates

We’ll send you a myFT Daily Digest email rounding up the latest Big tech news every morning.

Dear reader,

It’s impossible to overstate how important tech stocks are to the US market right now. Just seven companies account for almost 30 per cent of the S&P 500 index. No pressure, but they will need to produce a good set of quarterly earnings to keep this year’s market rally going. I predict that we’re going to see low growth, high capex and lots of chatter about artificial intelligence.

Look at a chart of the seven biggest tech stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — and it’s staggering how far market caps have leapt in the past three years. Five of those companies are valued at more than $1tn.

What will happen next? Two weeks ago I was a guest on the FT’s new Unhedged podcast, squaring off against editor Rob Armstrong to defend the so-called magnificent seven tech stocks. We agreed on two points, namely that the tech sector is highly valued on a historical basis and that growth is paltry. But there was one important point on which we disagreed. Rob believes AI hype is at its peak. I think it has further to run.

The way in which tech share price increases have outpaced expectations of earnings growth makes relatively little sense. But the tech sector is not a sensible place. This is an industry busy throwing money hand over fist at AI companies that claim there is not an insignificant chance that their products will destroy us all.

What AI has done, however, is create hope that an entirely new source of revenue is about to be unlocked. Combine that with headcount reductions, a halt on interest rate rises and diminished forecasts of recession and you have this year’s unexpected market rally.

Broadly, forecasts are optimistic. OK, Tesla did not get things off to a great start. Price cuts meant higher revenue at the expense of a lower operating margin. But on Tuesday, both Alphabet and Microsoft reported revenue and earnings growth, albeit at the sort of levels that would have been deemed poor in previous years. Both made sure to drop the word AI constantly.

Nvidia stands out for its high growth forecasts. It offered hints in its last earnings call that the rest of the year was likely to be full of good news. Elsewhere, annual growth expectations are what the kids online would call “mid”. Alphabet, which reported 41 per cent revenue growth in 2021, is expected to report a 6 per cent increase this year. Amazon is expected to match last year’s 9 per cent-ish growth. Meta is likely to report a similar figure. Apple’s revenue may be down.

On a more positive note, the heavy cost cuts that followed last year’s market sell-off are still feeding through. And while net income margins cannot compare to the giddy days of 2021, they are expected to rise on last year. The unknown quantity is capital expenditure. AI is an expensive endeavour. Note that Microsoft reported capex of almost $11bn in the last quarter, up from just under $8bn in the previous three months.

Of course, there are possible hurdles in the way. Investor patience over the high cost of AI development may wane. Fellow Lex writer June Yoon says we should all be thinking more about the big gap between the market performance of Nvidia and the Asian companies that supply its chips, including TSMC. This points to one potential weak link in the AI story: limited availability of the sophisticated semiconductors required. 

The time lag of chip supply means that the extent of this possible constraint will not be clear for months to come. For now, the S&P 500’s tech-heavy concentration is in no danger of being capsized.

 Elsewhere in tech 

If Elon Musk stopped tweeting (X-ing?) for five minutes and read Gurwinder Bhogal’s newsletter, he’d find some useful commentary about the dangers of trying to live up to your online persona. 

“Type ‘Disney World’ into JSTOR and you will unearth many pages about how the theme park is not a Rabelaisian carnival (glad that’s been cleared up), or about how it is a monument to death, or about how it is somehow in dialogue with synthetic Cubism or Mecca or Hegel’s end of history.” Molly Young visited Disney World for The Paris Review. 

Vox has a useful long read on Anthropic, the “responsible” AI company.

Enjoy the rest of your week,

Elaine Moore
Deputy head of Lex