Big Tech Earnings Growth: A Portfolio Manager's Perspective

As we step into 2025, the tech sector is poised for another strong year, with a portfolio manager predicting a 20% earnings growth for Big Tech companies. This optimism is driven by several factors, including the continued growth and monetization of artificial intelligence (AI) technologies, cost control measures, and reaccelerating demand for cloud services.



AI spending and monetization are expected to be key drivers of earnings growth for Big Tech companies in 2025. As the AI craze enters its third year, analysts expect investors to shift their focus from building out AI capabilities to deploying and monetizing AI products. This pivot, known as "Phase 3" of the AI evolution, is expected to drive growth for software and services providers like Microsoft, Amazon, and Alphabet (Goldman Sachs analysts, 2024). Additionally, AI adoption and efficiency gains are expected to lead to cost savings and improved margins for these companies.



The earnings story for the Magnificent Seven tech companies starts with cost control measures implemented after the 2020 pandemic tech binge. As demand for AI implementation and related services increased, cloud growth reaccelerated, leading to a boost in earnings estimates for the year ahead (JPMorgan analysts, 2024). The hyperscalers (Microsoft, Amazon, and Google) tightened their belts on costs and reduced headcount after a slowdown in demand across business functions. This cost control, combined with reaccelerating demand, has offered a boost to earnings estimates for the year ahead.



While the projected 20% earnings growth for Big Tech in 2025 is a positive sign, investors should be aware of the risks associated with high valuations and the potential for a correction if earnings growth slows or fails to meet expectations. However, given the confidence in the earnings trajectories, it is more appropriate to look at valuations on an earnings growth-adjusted basis, such as the price-to-earnings-to-growth (PEG) ratio. This measure shows that the Magnificent 7 valuations still look reasonable to inexpensive.



In conclusion, the tech sector is expected to continue its strong performance in 2025, with a portfolio manager predicting a 20% earnings growth for Big Tech companies. This growth is driven by the continued growth and monetization of AI technologies, cost control measures, and reaccelerating demand for cloud services. While investors should be aware of the risks associated with high valuations, the reasonable valuations and strong earnings growth prospects make Big Tech an attractive investment opportunity. As always, it is essential to conduct thorough research and stay informed about the latest developments in the tech sector to make well-informed investment decisions.