What If The Top Big Tech Companies See A Profit Decline In 2024?

There have been conversations surrounding the question of what would possibly cause a profit decline in big tech. The possibility of a profit decline in 2024 for the biggest tech companies—Apple, Amazon, Google’s Alphabet, Meta, Microsoft, and Nvidia—brings many questions up. Different contributors such as market cycles, economic conditions, and competitive pressures play very important parts in this:

Market Cycles & Economic Conditions

Jonathan Golub, Chief U.S. Equity Strategist at UBS, focuses on the cyclical nature of the tech industry. “Our downgrade of the Big 6—from Overweight to Neutral—is not predicated on extended valuations or doubts about AI,” he explains. Instead, it acknowledges difficult comparisons and cyclical forces affecting these stocks.

The pandemic disrupted earning cycles, with lockdowns boosting demand for PCs, online shopping, and gaming, followed by declines as economies reopened. Earnings growth surged during the pandemic but is now expected to normalie, leading to potential profit declines.

AI & Cloud Computing

Although concerns about profit decline exist, AI and cloud computing continue to drive revenue growth. UBS Editorial Team reports that capital expenditure among top tech companies like Microsoft, Alphabet, Meta, and Amazon is projected to reach USD 205 billion this year, largely driven by AI infrastructure. This spending supports a positive outlook for the semiconductor industry, with expected revenues increasing by over 50% to USD 164 billion next year.

Cloud platforms from Microsoft, Alphabet, and Amazon report accelerated revenue growth, nearing 24% year over year, compared to below 20% in the previous quarter. This shows strong monetsation of AI, contributing positively to software earnings growth.

Investor Expectations

Investor expectations play an important part in tech stock performance. Geo-political and economic uncertainties, and changes in Federal Reserve policies, can bring more volatility into the market. Nasdaq experienced a 7% decline over 6 trading days in April due to these very kinds of uncertainties.

The more earnings normalise and economic conditions fluctuate, investor sentiment may see a shift. Structured strategies can help investors position for potential upside while protecting against market downturns.

What Are Tech Companies Planning?

Tech companies are likely to adjust their plans to face possible profit declines. Increasing cash-flow generation and defensive financial actions, such as Apple’s share buy-back programme and dividend increases, show strength. UBS expects big tech’s combined free cash flows to grow by 22% to USD 560 billion in 2025, providing a sense of security against economic difficulties.

So, What Are The Experts Saying?

We asked experts in the industry what they think would happen if we saw a profit decline this year as well. Interesting commentary with different angles have been shared, and we have noted them below:

Our Experts:

• James Leaver, CEO, Multilocal
• Kate Leaman, Chief Market Analyst, AvaTrade
• Phillip Burr, Head of Product, Lumai.
• Carl Uminski, Partner, CI&T
• Avinav Nigam, Founder, TERN Group & Member, Forbes Technology Council

James Leaver, CEO, Multilocal

“Today, there is a tendency to rely on tech giants because they are omnipresent in our lives – not just at work, but everywhere. This, of course, is why their walled gardens are so appealing to advertisers.

“As a self-funded startup in adtech we have always been very focused on ensuring that we de-risk our business at every turn, which means not relying on any one source for our growth. We therefore believe that regardless of what happens with the Big 6, we know what long-term success looks like for our business and remain focused on driving towards that.”

Kate Leaman, Chief Market Analyst,  AvaTrade

“If the profits of the ‘Big 6’ tech companies start to falter in 2024, the impact could be significant and wide-reaching. These tech giants have been major drivers of stock market growth, so a slowdown could lead to a decrease in overall market confidence and investment values. Investors might start looking for stability elsewhere, which could boost sectors like utilities or consumer goods that typically offer steady returns.

“Additionally, a profit decline in these major companies may prompt a re-evaluation of tech sector valuations. These companies have commanded high price-to-earnings ratios based on their growth potential; if that growth is in question, their stock prices might adjust downward to reflect new realities.

“On the innovation front, reduced profits could lead to scaled-back investments in research and development. This might slow the pace of technological advances and could give smaller tech firms a chance to close the gap in market share.

“Finally, job markets in tech-heavy regions could feel the effects if these companies tighten budgets and slow hiring, affecting local economies and possibly leading to a broader economic slowdown if the trend is widespread.

“This scenario underlines the importance of diversification in investment portfolios and may prompt investors to seek out new opportunities beyond the traditional tech giants.”

Phillip Burr, Head of Product, Lumai.

“Even if there was a drop in profit margin from the big six tech companies it is likely to be only in the short term. With their focus and continued investments in AI, these companies are absolutely in the right market – AI is set to revolutionise the way that we live and work and will reap rewards for AI companies across the value chain. It is critical that we think long term when thinking about the value of AI in tech companies.”

Carl Uminski, Partner, CI&T

“Despite an uncertain start to the year, the tide is turning for Big Tech, with Microsoft and Google both reporting higher revenues. Healthier profit margins against a backdrop of cost-cutting, together with the introduction of Generative AI, are welcome news for the markets and tech sector.

“Cash reserves and free cash flow are increasing, which indicates growth through acquisitions and investments is likely on the horizon.

“We’re now starting to see Generative AI’s real impact, with the race very much on between Microsoft and Google. Next, they must consider how to monetise this following such massive hype, being careful not to cannibalise existing revenue streams but rather build new, complementary ones.

“For Google especially, it will be interesting to see if its experimentation with Generative AI on its US search engine page complements the company’s main revenue stream from paid search, potentially giving it an edge.

“No small company will be able to catch up with these big players right now. Despite this, AI’s widespread impact across a range of sectors still provides plenty of choice for investors, keeping the major players on their toes.”

Avinav Nigam, Founder, TERN Group & Member, Forbes Technology Council

“The current market shift, particularly among the six major technology companies, represents more of a minor correction than a complete collapse. Notably, this adjustment includes substantial tech firms like Apple, Amazon, Alphabet, Meta, Microsoft, and Nvidia. These companies are anticipated to experience a decline of around 15% in the coming quarters.

“Goldman Sachs has subtly indicated that this adjustment is expected and has revised its outlook from ‘overweight’ to ‘neutral’. It’s important to note that this forecast isn’t a reflection of the companies’ fundamental health, which remains robust.

“Outside of these six tech giants, the broader market is expected to see a significant increase, with earnings per share projected to grow by almost 26%—a notable rise from the previous figure of 11%. This indicates a healthy state for the tech sector overall.

“The AI boom has played a significant role in this scenario, particularly benefiting companies like Nvidia and Apple. This has allowed them to maintain high valuations without reaching an unhealthy point.

“The price-to-earnings ratios of these firms are generally high, ranging between 22 and 40, compared to the S&P average of around 25 to 26, suggesting a slight overvaluation but not critically so.

“Looking forward, the market does not seem to be gearing up for a major correction. Positive developments include increased AI regulation in the US and a healthy outlook for IPOs in the next 12 months.

“Geographically, while the Indian market has seen a positive correction, the US continues to show strong momentum, and Europe is slightly behind but expected to recover by the end of the year.

“In conclusion, the technology sector remains a strong investment area, with no significant downturn expected in the near term. The ongoing shift towards more AI integration and the continuous flow of innovative companies towards public listings suggest a vibrant, evolving market landscape. Over the next year, my perspective on investing in this sector remains optimistic.”