Global Technology: Sell-off Presents Opportunity
We reaffirm our constructive stance on tech as an anchor on the growth end of the DBS CIO Barbell Strategy
Chief Investment Office, Yeang Cheng Ling6 Sep 2024
  • Tech stocks were sold off this week on the back of market jitters and weak macroeconomic data
  • Leading the decline was NVIDIA; record loss of USD279bn in market capitalisation in a single day
  • We remain structurally bullish on tech; AI and resilient IT spending support strong earnings growth
  • Other near-term developments like the new iPhone launch should catalyse a turnaround in sentiment
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Markets under selling pressure – Tech stocks hardest hit. The week has seen markets come under selling pressure, led by AI heavyweight NVIDIA who was recently dealt a double whammy in the form of unmet investor expectations following their latest earnings release, and a subpoena from the US Justice Department as part of a wider antitrust probe on the chipmaker. Market momentum was also further dampened by weakness in US macroeconomic data, with ISM manufacturing logging its fifth consecutive month of contractionary data and job vacancies falling in July to their lowest in more than three years , stoking additional recession fears.

Victims of lofty expectations. Notwithstanding these latest developments, we remain structurally bullish on the technology sector and its stalwarts, on the basis of strong earnings growth and compelling shareholder returns. While investors were disappointed with the latest round of earnings, we argue that it had more to do with expectations being too lofty, as opposed to Big Tech surprising on the downside. NVIDIA did beat expectations on both revenue and earnings in its latest results release, but it simply failed to reach the higher end of the forecasted range. Overall, earnings growth for Big Tech companies remains encouraging with a majority of companies posting beats on both their top and bottom lines in the previous quarter while providing positive forward guidance.

Table 1: Earnings guidance remains encouraging

Source: Company announcements, DBS

Sell-off presents opportunity to re-engage tech leaders. We believe this earnings growth momentum will be sustained in the future, driven by irreversible secular trends such as the continued digitalisation of the global economy and the proliferation of AI-enabled devices and applications. In fact, we argue that AI as a megatrend is but in its early innings and has yet to experience the bulk of its growth; the total addressable market for AI is expected to grow to a staggering USD2.6tn by 2032 (Figure 1). This strong structural growth will continue to support superior shareholder returns for Big Tech, which currently sits above 20% (Figure 2). Against this backdrop, we believe that this round of sell-offs presents an opportunity for investors to re-engage technology leaders at a more reasonable valuation.

Proven long-term track record in IT spending. Another factor that will support earnings growth and shareholder returns for the technology sector is the established resilience of IT spending over time. Capital expenditure and R&D spending is a crucial factor in driving growth in technology-related sectors, and they have proven to be extremely resilient through multiple cycles - even in the face of black swan events. Overall IT spending stayed impervious to the effects of the Covid pandemic from 2019 to 2021, only dipping marginally post the 2008 GFC. With IT spending set to remain robust, we can expect continued innovation from technology leaders, which will in turn drive strong future pipelines, both in the hardware and software space.

Positive catalysts ahead. While the past month has been challenging for technology stocks and Big Tech, we foresee brighter days ahead. Other than the structural long-term tailwinds mentioned above, there are other catalysts on the horizon that should support a turnaround in sentiment in the technology space over the shorter-term:

  1. Launch of the new iPhone in early September should drive a new wave of excitement as it will be the first model to feature Apple Intelligence, an AI platform developed by Apple.
  2. Launch of NVIDIA’s Blackwell chipset in 4Q24 should be a positive development for the company and technology space.
  3. Consensus earnings for Big Tech firms are still projected to grow at mid-to-high teens over the next two to three years, outpacing other sectors.
  4. Impending rate cuts by the US Fed should increase liquidity in markets and give a boost to risk sentiment in general.

Reaffirming our structurally bullish call on Big Tech and I.D.E.A. Having established both the long-term and short-term tailwinds for the sector, we reaffirm our constructive call on the Big Tech and technology sectors as anchors on the growth end of the DBS CIO Barbell strategy. Utilise the I.D.E.A (Innovators, Disruptors, Enablers and Adapters) framework to identify winners along the technology value chain and across verticals such as IC design, semiconductors, and software applications. The recent market sell-off provides a good opportunity for investors who did not manage to catch the Big Tech growth-train early on to re-engage highly valued technology leaders at a more reasonable valuation.



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