Big Tech is in 'penalty box' for now: Barclays strategist

Big Tech stocks are in positive territory following sell-off woes, now pushing the market indexes (^DJI, ^IXIC, ^GSPC) higher in a slow recovery effort. In a note, Barclays Head of US Equity Strategy Venu Krishna wrote that tech leaders are in "the penalty box" at this time.

Krishna joins the Catalyst team in-studio to talk about the refocus on AI monetization while tech stocks are trading increasingly higher than their earnings.

"If you look at Meta (META), they posted very good numbers on digital ads. If you look at Amazon (AMZN), they posted very good numbers on their AWS side. And so if you look at individual names, they are checking the box," Krishna tells Yahoo Finance. "But clearly as the focus changes on onto the monetization of AI, from here on you don't want to pay very high multiples and you want to see actually the monetization showing up in earnings. And clearly this is a secular trend..."

Krishna goes on to give his year-end forecast for the S&P 500 (^GSPC) and communicate how he sees the rest of the market (^DJI, ^IXIC) reacting to third quarter earnings forecasts.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

Video Transcript

You've got big tech names like in Video, Microsoft, Meta and Alphabet, all coming on to your screen right now and bouncing back.

Just taking a look at the games that you see across the board here and video of 2.5%.

Microsoft is up 2.5% and me is up 3%.

Alphabet is also up 2% here, so looks like me is leading those gains.

And this comes as we are heading into a video earnings as the next big test for markets.

The big question.

Where can we expect the tech sector to go from here, joining us now to discuss?

We have been Krishna.

He is the head of US equity strategy at Barclays.

Then thank you so much for popping on set with us here during that read.

I appreciate it.

So you know, in your in your not you said Big.

T is in the penalty box, which I loved.

Explain to me what you mean by that and why it's happening now.

I think if you step back and see, tech is in good shape, by the way, so we still like it.

The reason it's in the penalty box is if you look at all the returns you saw from June to July, it was driven by big tech, and it's driven not so much by a revision in earnings upwards, but more about multiple expansion.

So they were trading at around 29 times.

They went to 34 times a pretty dramatic move.

So we felt that move was pretty dramatic.

And which sets up the fact that we are in a highly concentrated market.

So if anything were to go wrong, that's the first area we will correct.

Now, To be honest, we felt the catalyst may come from rates going up.

Uh, in fact, it went the other way around, rates went down and yet bit tech corrected.

And now here we are, in a spot where we actually like tech again simply because you are trading in the range of I think.

Yesterday it hit 27 times.

The bottom for big tech was 25 times in 2022 sell off, right?

And if you look at their earnings, how they have done now, clearly the market is focusing more on monetizing a I spend.

But the reality is on key metrics.

Some of the biggest names are done very well.

If you look at meta, they posted very good numbers on digital ads.

If you look at Amazon, they posted very good numbers on their AWS side.

And so if you look at individual names, they are checking the box.

But clearly, as the focus changes onto the monetization of a I from here on, you don't want to pay very high multiples and you want to see actually the monetization showing up in earnings.

And clearly this is a secular trend.

So we are in the early stages of that man.

What does that tell us?

If you are maybe seeing more of an opportunity now in tech, given the sell off or the drop that we had seen, what does that tell us?

Maybe about the broader market.

Here we are, with the S and B just above 50,300.

If we were to see maybe a return or maybe some momentum return to some of those larger cap tech names, what does that then tell us maybe ultimately about some of that momentum that we could see here return to the broader market.

That's exactly what makes us very hopeful.

So we have an official price target of 5600 for S and P this year, and what's interesting is that since last quarter, finally we saw the first signs in which there was some broadening happening.

It's been incremental and we've said that for a while that we have to learn to live with narrowness and we have lived with for almost two years now.

But now we are coming to a stage where big tech is moderating and rightfully so, even though their earnings are going to settle at a very strong level.

Call it 17 to 20% over the next six quarters, but the rest of the market is improving.

So if you saw the beginning of the year they were returning forward estimates of flat, then they went up to a percent.

Then, as the earnings started as five, now it's 6% right, so indeed it is improving if you look at our earnings right now, the breadth of beats was much broader than historical averages.

If you look at earnings growth, broadly speaking, S and P overall close to 10% again higher than long term averages.

If anything, the only difference now is that the magnitude of surprise has come down across S and P, which is fine.

It just tells me that more optimism is baked into numbers, right there are that said, a few red flags.

So, for example, if you look at estimates for the next quarter, they have been pulled back quite sharply.

And yet for the following quarters, nothing has changed, right?

So I think our view is that this broadening is going to happen.

It's going to be a much slower pace than what people are expecting, and it will play out more in 25 rather than this year.

But broadly speaking, directionally, we are headed in the right direction.