The market has high hopes for AI technology giants, with second-quarter profits of AI six giants, including Nvidia, expected to grow by 30% year-on-year, far exceeding the 5% growth rate of the other 494 component stocks of the S&P 500. However, historical data shows that high-growth stocks with high valuations often face greater downside risk if they fail to meet expectations.
As the second quarter earnings season of US stocks is approaching, Wall Street investors are on hold, as Goldman Sachs warns that tech giants face a "severe profit test" this earnings season.
Currently, the market generally expects S&P 500 component stocks' earnings in the second quarter to jump significantly, with a year-on-year growth rate of 9%, the highest growth rate since the fourth quarter of 2021. It is worth noting that this expectation is in sharp contrast to the previous few quarters, where earnings growth expectations were almost flat for the past three quarters, or even negative for the previous three quarters.
Goldman Sachs compares high earnings expectations to the "financial Olympics" in its latest report.
Goldman Sachs' chief stock strategist, Kostin, warns that such optimistic expectations may be difficult to achieve. In the past six months, analysts have only lowered earnings expectations by 1%, far below the 7% decline in the past. This means that it will be even more difficult for companies to exceed expectations as usual.
Undoubtedly, the "earnings game" will once again be led by super large AI stocks. Analysts expect the second quarter revenue and profit of six giants such as Nvidia to increase by 17% and 30% year-on-year, respectively. High-profit forecasts mean that even a "small episode" could make the overall US stock market less optimistic.
High Expectations for AI Stocks
As the earnings season approaches, the market's focus will be on tech giants. Their performance is not only related to their own stock prices, but also likely to affect the direction of the entire market.
The market has high expectations for AI technology giants. Analysts predict that the six technology giants, including , will see a year-on-year profit growth of 30% in the second quarter, far higher than the 5% growth rate of other 494 companies.$Amazon (AMZN.US)$, $Apple (AAPL.US)$, $Alphabet-C (GOOG.US)$/$Alphabet-A (GOOGL.US)$, $Meta Platforms (META.US)$, $Microsoft (MSFT.US)$ and $NVIDIA (NVDA.US)$Other
However, Goldman Sachs believes that:
Revenue growth of five stocks, including Meta, Microsoft, Nvidia, Google, and Amazon, will slow down from 22% in the first quarter to 17% in the second quarter, further slowing down to 15% and 14% in the third and fourth quarters, respectively, and their net income ratio will also shrink.
Among them, Nvidia's revenue is expected to slow down from 262% in the first quarter to 110% in the second quarter, 72% in the third quarter, and 55% in the fourth quarter.
Goldman Sachs further warns that:
These tech giants' valuations are already at extremely high levels. For example, the market-to-sales (EV/Sales) ratio of the top five AI tech stocks is as high as eight times, far exceeding the median of three times for S&P 500 component stocks.
Historical data shows that growth stocks with high valuations often face greater downside risk if they fail to meet expectations. Specifically, in the past 15 years, if companies with a market-to-sales ratio of more than 8 times fail to meet sales expectations, their stock price performance usually lags behind the median stock in the Russell 3000 Index by 32%. In contrast, the performance of undervalued companies is much better when they fail to meet expectations.
Overall, Goldman Sachs believes that unless the earnings of AI giants can continue to exceed already optimistic expectations, the strong uptrend in the first half of the year may be difficult to sustain.
Editor/Somer