Wall Street Lunch: Big Tech Bearishness?


Crashing negative banking statistics


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UBS downgrades Apple, Amazon, Google, Meta, Microsoft and Nvidia. (0:16) Five risks to the $2 trillion private credit market. (1:55) Expect 13 new weight-loss drugs by ’29. (5:11)

This is an abridged transcript of the podcast.

Our top story so far

UBS sounded a warning on its list of Big 6 tech companies.

Strategists led by Jonathan Golub downgraded Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (GOOG) (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), and Nvidia (NASDAQ:NVDA). It cut all the stocks to Neutral from Overweight citing earnings momentum reversal.

From their January 2023 lows to their April 2024 peak, Big 6 TECH+ stocks advanced 117%. They have since declined 8%.

UBS’ TECH+ universe includes all of the Technology Sector, Internet Retail within Discretionary, and Interactive Media and Services, Interactive Home Entertainment, and Netflix (NFLX) from Movies & Entertainment within Communication Services.

Golub said: “Investors attribute the run in mega-cap stocks to animal spirits and the impact of AI; however, our work indicates that surging earnings momentum (change in forward growth projections) fueled this upside.”

This momentum is collapsing, with Big 6 EPS growth expected to decline from 42% to 16% over the next year, while the rest of TECH+ and non-TECH+ stocks accelerate.

Seeking Alpha analyst Ahan Vashi writes that “it is fair to say that the technical setup for big tech stocks heading into their Q1 reports is bearish.”

“While I expect Q1 earnings to be okay overall, the recent correction in the frothy ‘Magnificent 7’ basket could deepen further in the upcoming weeks if the earnings and/or forward guidance fall short of lofty expectations. Conversely, blowout earnings from big tech giants could restore investor confidence and lead to a short-term bounce in equities.”

In today’s trading, stocks have given up an early bounce following Friday’s big selloff. All the megacap sectors are in the red.

Looking away from the public markets, there is plenty of discussion about private credit and equity.

While not currently close to a systemic risk, the rapidly growing but opaque and relatively new private credit market warrants closer scrutiny, according to the International Monetary Fund.

“This market emerged about three decades ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets,” IMF economists said. “In the past few years, it has grown rapidly as features such as speed, flexibility, and attentiveness have proved valuable to borrowers. Institutional investors such as pension funds and insurance companies have eagerly invested in funds that, though illiquid, offered higher returns and less volatility.”

Christopher Wood, global strategist at Jefferies, wrote in his latest Greed & Fear note that it “remains extraordinary” that pension funds, insurance companies, and family offices “have for years been pouring money into locked-up investment vehicles, such as private equity and private credit, at the same time as it has become by all accounts extremely hard to raise money for actively managed equity and fixed income bond products, which offer much greater liquidity.”

It is “only a matter of time before this approach to investing will be questioned, if not discredited altogether,” Wood said. “For it depends on an illusion of liquidity, which does not really exist.”

The IMF said risks to the private credit market include rising interest rates, stale and subjective markdown valuations, hidden leverage, material exposure from insurers and pension funds, and a growing retail presence raising liquidity risks.

The “financial engineering skills of the private world are never to be underestimated in terms of their ability to keep the game going,” Wood added. “But that is much easier to keep doing in a world where interest rates are declining, not rising.”

Looking to earnings and active stocks

Verizon (VZ) reported first-quarter earnings that topped estimates, aided by growth in its wireless unit. Retail postpaid phone net additions came in at 253,000.

Looking ahead, Verizon still expects to earn between $4.50 and $4.70 per share for the full year on an adjusted basis, compared to the analyst estimate of $4.57 per share. It also expects wireless service revenue to grow between 2% and 3.5%, while adjusted EBITDA is forecast to grow between 1% and 3%.

Tesla (TSLA) hit a new 52-week low after a weekend of perhaps troubling developments on the pricing front. The electric vehicle maker lowered prices in many of its major markets, including China and Germany, following notable price cuts in the United States.

Due to softening demand, Elon Musk reportedly reasoned that Tesla should cut 20% of its workforce due to the company’s Q4 deliveries falling by the same amount. That may be another indication that Tesla is prioritizing the buildout of a robotaxi fleet over the development of the mass-market Model 2.

J.P. Morgan started coverage on Cisco Systems (CSCO) with a Neutral rating and a $53 price target.

Analyst Samik Chatterjee says, “We are establishing a Neutral rating despite what we see as a favorable near-term set up with moderating incremental headwinds in the networking market and discounted relative valuation in the context of the re-rating of the group, as we believe the medium-term outlook remains muted with our expectations for an EPS CAGR of 5%+ in FY24-FY27.”

In other news of note

Drugmakers are preparing to launch an estimated 13 new weight-loss treatments in the U.S. over the next five years amid surging demand for the products. That’s according to a new report by Global Data.

Beginning in 2024, the number of obesity drug launches is expected to climb significantly, reaching a peak of four launches per year in 2027 and 2028. In comparison, only three products were launched between 2019 and 2023.

Fueling demand is the skyrocketing rate of obesity in the U.S., with the World Health Organization predicting that around 50% of US adults will be considered obese by 2030, up from 42% in 2020 and 31% in 1999. Meanwhile, sales of weight-loss drugs have also soared, with Novo Nordisk’s (NVO) Wegovy and Eli Lilly’s (LLY) Zepbound generating $9.7 billion in global sales in 2023.

And in the Wall Street Research Corner

Goldman Sachs has rebalanced its basket for stocks levered to capex and R&D spending. Overall, they expect spending growth to slow to 7% this year, down from 10% in 2023.

Strategist David Kostin says higher “interest rates have led to a higher cost of capital for firms, making it unlikely that capex growth will accelerate in the near term.”

“Sales growth is the largest driver of R&D growth in our model, and we forecast sales will grow by 6%. The AI investment cycle among the mega-cap tech stocks will support investing for growth. After several quarters of cost discipline, many mega-cap tech firms appear committed to investing in AI.”

Among the stocks in the sector-neutral basket are Meta (META), AT&T (T), United Airlines (UAL), Intel (INTC), GM (GM), Kroger (KR), Diamondback Energy (FANG), AES (AES), Merck (MRK), and Eastman Chemical (EMN).

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