Is big tech back?

Episode Summary

Executive Summary: The episode argues that tech’s 2023 rebound is driven by improving fundamentals, easier positioning, and AI optimism, not just speculative momentum. Mega-cap profitable tech has led while smaller and unprofitable names lag. Earnings have broadly beaten expectations, but risks remain around CapEx slowdown, inflation/Fed policy, and recession.

Main Topics: Tech’s rebound versus 2022 (Priority: 5/5): Ben and Peter frame 2023 as a near mirror image of 2022: the S&P 500 and tech reversed sharply, with large-cap tech leading the market after a brutal prior year. Profitability and market bifurcation (Priority: 5/5): Performance remains highly concentrated in the most profitable mega-cap names, while non-profitable tech and smaller tech stocks have been mostly flat, reinforcing the 'big over small' theme. Earnings season strength (Priority: 5/5): Tech companies reporting so far have delivered unusually strong earnings beats, with both revenue and margin outperformance indicating that cost cuts and demand stabilization are working. Investor positioning and flows (Priority: 4/5): The rally has been fueled mainly by institutional re-leveraging after late-2022 capitulation, while retail participation has been muted compared with prior meme-stock/crypto-driven phases. CapEx, spending, and AI (Priority: 5/5): CIO spending surveys show weaker near-term capital spending plans, but AI is presented as a major long-term secular tailwind that could expand TAM and profit pools. Macro, Fed, and valuation (Priority: 5/5): The speakers argue that tech does best in weak-growth, disinflationary environments; the biggest risk is renewed inflation and further Fed tightening, though valuations are no longer as cheap as they were a year ago.

Key Arguments: 2023 has been a dramatic reversal from 2022: broad tech and mega-cap names have swung from large losses to large gains. Tech’s outperformance is being driven by both micro factors (better earnings expectations, cost cuts, margin recovery) and macro factors (weak growth supporting scarce idiosyncratic growth). The rally is narrow: profitable mega-caps are carrying most of the market, while unprofitable tech and smaller tech companies are not participating meaningfully. Institutional investors, especially hedge funds, had been underexposed after late-2022 drawdowns and are now rebuilding positions; retail is not the main driver this year. Earnings have been materially better than feared, with over 75% of tech reporters beating estimates so far, and analysts revising earnings estimates higher. AI is a clear long-term tailwind, but winners and losers are still uncertain; the sector should capture at least part of the economic upside. Near-term CapEx demand looks weaker, which could pressure revenue growth later, but this is expected and may reverse by late 2023 into 2024. The sector’s biggest macro risk is a reacceleration in inflation that forces the Fed to keep hiking; recession is also a risk because tech is not immune to cyclical revenue pressure. Current valuations are richer than the start of the year and above recent averages, but not extreme versus the broader market and long-term context.

Data Points: S&P 500 performance (2022): down 18% - Used to contrast with 2023’s market rebound Tech sector performance (2022): down 28% - Illustrates last year’s underperformance S&P 500 performance (2023 YTD, as of recording): up roughly 8-9% - Benchmarks the broader market during tech’s rally Tech sector performance (2023 YTD, as of recording): up more than 20% - Shows tech as one of the market’s best sectors Largest tech stocks average performance (2022): down more than 40% - Describes prior-year decline in mega-cap tech Largest tech stocks average performance (2023 YTD, as of recording): up more than 40% - Highlights strong rebound in mega-cap names Consensus tech earnings estimates (2022): fell by more than 15% - Reflects the prior year’s fundamental deterioration Tech companies beating earnings so far: over 75% - Quarter-to-date reporting companies have exceeded expectations Historical average earnings beat rate: about 50% - Comparison point for the unusually strong current beat rate Potential ranking of current tech quarter: one of the strongest in 20+ years of data - If current beat pace continues through the quarter Mega-cap tech stock moves: up anywhere from 30% to 100% - Shows the magnitude of the rally in leaders such as NVIDIA and Tesla Non-profitable tech index performance: flat on the year - Evidence of bifurcation within the sector Russell 2000 Technology Index performance: flat on the year - Smallest tech companies are not participating in the rally NASDAQ valuation: about 25x earnings - Current valuation discussed by Peter Callahan NASDAQ 7-year average valuation: slightly below 25x, in the low 20s - Recent-history comparison for valuation NASDAQ starting valuation for 2023: 22x earnings - Shows multiple expansion during the rally Whole equity market valuation percentile: 80th–85th percentile versus last few decades - Ben argues the market is broadly expensive historically CIO spending survey reading: lowest outside 2008 and 2020 recessions in 20 years - Signals weak capital investment intentions U.S. labor force share in tech and tech-related industries: less than 5% - Used to argue layoffs are not a major macro employment shock U.S. labor force size: over 150 million people - Provides denominator for the employment argument AI-driven global GDP growth forecast: $7 trillion over the next decade - Goldman Sachs Research macro forecast cited in discussion AI impact on software TAM: roughly 20% increase over the next decade - Micro-level forecast for software opportunity expansion Google and Microsoft AI mentions on earnings calls: over 80 times - Illustrates how central AI has become to company narratives

Pivotal Quotes: "This year has been almost a mirror image reversal of last year." — Ben Snyder: Describing the dramatic swing in tech and market performance from 2022 to 2023 "If we continue at this rate through the rest of this quarter, this will be one of the strongest quarters of tech results in the 20-plus years of data history that we have." — Alison Nathan: Setting up the discussion after noting strong early earnings beats "The number one risk would be Fed and inflation." — Peter Callahan: Summarizing the main macro threat to the sector

Implications: Tech looks supported by real earnings strength and AI optionality, but the rally is concentrated and vulnerable to rates/inflation. Investors may prefer profitable mega-caps, while smaller or unprofitable tech remains at risk if growth or policy worsens.