The US tech dominance is narrowing down to fewer and fewer stocks, namely those involved in building generative AI and the infrastructure needed to run it.
"Since 2023, the median expected earnings growth for tech and communication companies in the Stoxx Europe was 10.3%, well below the average for US non-AI companies of 38%. But when I look at realised earnings growth then European tech and communication companies beat their US peers with a median earnings growth of 10.1% YoY vs. 5.1% for their US non-AI peers."
So expected earnings growth in Europe was +10.3% and the reality was +10.1%, but in the US it was +38% and the reality was +5.1%? I think I would've read about that in the newspaper at some point ... especially about European tech earnings growing at 2x the US rate! Anyway:
1) Could there be a base effect issue here? For instance, European semiconductor companies tend to be more exposed to automotive/industrial markets, whilst US peers lean more toward computing/data processing, the latter of which tends to be more cyclical, and the timing of recovery more uncertain. "Well, we were modeling +38%, and although it turned out to be +5.1%, that was a timing issue; the absolute recovery is still in place, but the y-y percent changes are now against "tougher comp(arison)s". Investors say, "okay, not a problem ... (with apologies to Alfred Lord Tennyson) 'tis better to have loved and lost than never to have loved at all headline growth rate-wise, but we'll look through that and it will all come out in the wash." Thus no sell-off ... especially if it's stock of a company in a "FOMO" (fear of mission out) sector.
2) The pool of US tech names is much deeper, so I'd be interested in the "tech and communications" universes used; if the European universe has Siemens, Schneider Electric, and a dozen telecom operators, a tighter experctations-to-reality relationship would be expected.
3) Also, were the expected earnings forecasts set by management guidance or street analysts? I've noticed a cultural difference where European and Asian analysts tend to not deviate much from explicit company forecasts, whilst American analysts show a much wider spread ... especially as analysts with "buy" ratings tend to post higher-than-consensus estimates and "hold/sell" analysts lower-than-consensus to underscore their recommendations; somewhat ironically, this may also work in the opposite directions, as some" buy" analysts like "beats", so may "sandbag" their numbers, and some "sell" analysts "set the bar high" such that companies "miss", and unlike being on the wrong side of a stock rating-wise, there's no perceived penalty for failure for "innacurate" earnings estimates.
As always, love your work ... it remains amongst the most thought-provoking out there.
Thanks Gunnar. So, with regards to your question about European tech growing twice as fast as US tech that is absolutely correct. My European tech basket includes 32 technology companies and 19 telecom companies based on ICB Supersector classification. Note that I use equal weighted data, not market cap weighted data so as to give a true representation of the industry trends rather than focus only on index heavyweights like ASML or SAP.
Similarly in the US, my basket contains 87 companies in the S&P 500 on a equal-weighted basis out of which 9 are in the AI basket (Accenture, Adobe, Alphabet, AMD, Meta, Microsoft, NVidia, Oracle, ServiceNow).
And yes, in Europe, analysts stick closer to company guidance than in the US while in the US analysts are making bullish forecasts that they then reduce massively before the results so the companies can beat the lower hurdle. This sandbagging is much more pronounced in the US.
And finally, yes, the cyclicality of tech stocks in Europe is different from the US. In the US, tech stocks tend to be early cyclicals because they focus on software and other low-cost items that recover faster after a slowdown. In Europe, tech is much more linked to industrial applications and the industrial capex cycle, so there tech stocks are not early cyclicals but mid-cyclicals like most industrials. It's why I am more bullish European tech right now than US tech (but that goes into my day job as a strategist and is only for paying clients of my employer :-))
Interesting... If I were to guess, the same phenomenon is occurring for companies at the bottom of the expectations pile... i.e. even if results are better than low expectations, they are being ignored because the perception based on the headline result is poor in absolute terms.
Sooner or later, the market will get in touch with reality. As Pat Murray said:
“Reality always wins; your job is to get in touch with it. Pretending an issue isn’t there doesn’t mean it isn’t going to happen. In fact, pretending an issue isn’t there guarantees it will happen.”
A huge chunk of the AI market are a handful of stocks: NVIDIA, TSMC, MSFT, GOOGL, AMZN, META, AMD, AVGO, DELL, SMCI... You need to consider their relative importance. Obviously, everyone knows the tech market is shitty (look at the WCLD, IGV, GS Non-Profit tech, PNQI, ARKK...), but some VERY LARGE companies are seeing success with AI. The median doesn't mean anything.
"Since 2023, the median expected earnings growth for tech and communication companies in the Stoxx Europe was 10.3%, well below the average for US non-AI companies of 38%. But when I look at realised earnings growth then European tech and communication companies beat their US peers with a median earnings growth of 10.1% YoY vs. 5.1% for their US non-AI peers."
So expected earnings growth in Europe was +10.3% and the reality was +10.1%, but in the US it was +38% and the reality was +5.1%? I think I would've read about that in the newspaper at some point ... especially about European tech earnings growing at 2x the US rate! Anyway:
1) Could there be a base effect issue here? For instance, European semiconductor companies tend to be more exposed to automotive/industrial markets, whilst US peers lean more toward computing/data processing, the latter of which tends to be more cyclical, and the timing of recovery more uncertain. "Well, we were modeling +38%, and although it turned out to be +5.1%, that was a timing issue; the absolute recovery is still in place, but the y-y percent changes are now against "tougher comp(arison)s". Investors say, "okay, not a problem ... (with apologies to Alfred Lord Tennyson) 'tis better to have loved and lost than never to have loved at all headline growth rate-wise, but we'll look through that and it will all come out in the wash." Thus no sell-off ... especially if it's stock of a company in a "FOMO" (fear of mission out) sector.
2) The pool of US tech names is much deeper, so I'd be interested in the "tech and communications" universes used; if the European universe has Siemens, Schneider Electric, and a dozen telecom operators, a tighter experctations-to-reality relationship would be expected.
3) Also, were the expected earnings forecasts set by management guidance or street analysts? I've noticed a cultural difference where European and Asian analysts tend to not deviate much from explicit company forecasts, whilst American analysts show a much wider spread ... especially as analysts with "buy" ratings tend to post higher-than-consensus estimates and "hold/sell" analysts lower-than-consensus to underscore their recommendations; somewhat ironically, this may also work in the opposite directions, as some" buy" analysts like "beats", so may "sandbag" their numbers, and some "sell" analysts "set the bar high" such that companies "miss", and unlike being on the wrong side of a stock rating-wise, there's no perceived penalty for failure for "innacurate" earnings estimates.
As always, love your work ... it remains amongst the most thought-provoking out there.
Thanks Gunnar. So, with regards to your question about European tech growing twice as fast as US tech that is absolutely correct. My European tech basket includes 32 technology companies and 19 telecom companies based on ICB Supersector classification. Note that I use equal weighted data, not market cap weighted data so as to give a true representation of the industry trends rather than focus only on index heavyweights like ASML or SAP.
Similarly in the US, my basket contains 87 companies in the S&P 500 on a equal-weighted basis out of which 9 are in the AI basket (Accenture, Adobe, Alphabet, AMD, Meta, Microsoft, NVidia, Oracle, ServiceNow).
And yes, in Europe, analysts stick closer to company guidance than in the US while in the US analysts are making bullish forecasts that they then reduce massively before the results so the companies can beat the lower hurdle. This sandbagging is much more pronounced in the US.
And finally, yes, the cyclicality of tech stocks in Europe is different from the US. In the US, tech stocks tend to be early cyclicals because they focus on software and other low-cost items that recover faster after a slowdown. In Europe, tech is much more linked to industrial applications and the industrial capex cycle, so there tech stocks are not early cyclicals but mid-cyclicals like most industrials. It's why I am more bullish European tech right now than US tech (but that goes into my day job as a strategist and is only for paying clients of my employer :-))
Interesting... If I were to guess, the same phenomenon is occurring for companies at the bottom of the expectations pile... i.e. even if results are better than low expectations, they are being ignored because the perception based on the headline result is poor in absolute terms.
I think you just gave me an idea...
Sooner or later, the market will get in touch with reality. As Pat Murray said:
“Reality always wins; your job is to get in touch with it. Pretending an issue isn’t there doesn’t mean it isn’t going to happen. In fact, pretending an issue isn’t there guarantees it will happen.”
Bad analysis.
A huge chunk of the AI market are a handful of stocks: NVIDIA, TSMC, MSFT, GOOGL, AMZN, META, AMD, AVGO, DELL, SMCI... You need to consider their relative importance. Obviously, everyone knows the tech market is shitty (look at the WCLD, IGV, GS Non-Profit tech, PNQI, ARKK...), but some VERY LARGE companies are seeing success with AI. The median doesn't mean anything.
How many stocks are in your basket of >50% revenue AI companies? Which stocks are they? Thanks
AMD, Adobe, Microsoft, Amazon, NVidia, Oracle, ServiceNow