Tech Sector Expected to Experience Fewer Positive Earnings Surprises in Q3 – Citi

Analysts at Citi have indicated a decline in the number of positive earnings surprises expected for technology stocks in the third quarter. In a note to clients released late Thursday, they shared that their forecasts predict a 5% drop in the frequency of quarterly earnings beats within the sector compared to the previous three months. Nevertheless, technology companies are still anticipated to report the highest number of better-than-expected results relative to other sectors.

Research from Citi revealed that technology and healthcare were among the sectors with the highest rates of positive surprises in the second quarter. However, in July, many global mega tech companies experienced significant drops in market capitalization after releasing their last quarterly earnings reports, as investor concerns grew over high valuations and the potential for only modest gains from substantial recent investments in artificial intelligence.

Prominent tech firms like Microsoft and Alphabet (Google’s parent company) each lost around 6% of their market value at the end of July, bringing their valuations to approximately $3.1 trillion and $2.1 trillion, respectively. They have largely maintained these levels since then. Meanwhile, Nvidia, a leading AI chip designer, saw its market valuation decrease by 5.2% to $2.8 trillion but has since rebounded to around $3.01 trillion.

Citi pointed out that positive earnings surprises in the third quarter are likely to be “more concentrated” among larger cap stocks, yet they also noted a significant increase in earnings beats for smaller cap companies. As for overall earnings growth, consensus estimates for Russell 1000 companies, which includes the largest 1,000 firms by market cap in the U.S., project a year-on-year increase of 5.2%. If the so-called Magnificent 7 megacap firms are excluded, earnings growth is expected to be 2.6%.