US tech giants face the toughest test in three years, Wall Street warns of a stock price storm behind the peak performance

According to the financial news app Zhitong Finance, the stock strategy team from Goldman Sachs, a top Wall Street investment bank, recently released a report stating that as U.S. listed companies prepare to announce second-quarter earnings data, they are facing the highest profit expectations threshold in nearly three years. The soaring U.S. stock market is about to face an extremely difficult "earnings battle". This means that the financial markets have become increasingly demanding in terms of profit expectations for S&P 500 index component companies, which is not good news for the Magnificent 7 tech giants and the S&P 500 index, both of which have seen their stock prices repeatedly hit new highs.

The Goldman Sachs strategy team stated that higher expectations mean that S&P 500 index component companies, especially large tech giants like Nvidia, Microsoft, and Google with high index weights, will significantly narrow the extent of earnings surprises. This will likely lead to a substantial reduction in stock price returns from earnings beats compared to the previous few quarters, and even a slight beat in earnings may trigger a sharp drop in stock prices. In this scenario, only far exceeding expectations can drive a significant increase in stock prices - just like Nvidia's earnings have far exceeded market expectations for four consecutive quarters.

In a report dated June 28th, led by Chief Equity Strategist David Kostin, the Goldman Sachs strategy team wrote that compiled Wall Street expectation data indicates that the overall profit growth of S&P 500 index component companies is expected to be around 9% from April to June this year, marking the largest year-on-year expected increase since the fourth quarter of 2021.

Kostin and other Goldman Sachs strategists stated, "The extent to which S&P 500 index component stocks exceed market expectations in terms of earnings per share (EPS) may significantly weaken, as the market generally expects much higher than in previous quarters." "We also expect that the 'stock price return' of stocks that exceed expectations in the second quarter earnings season will once again be lower than the average level of the past few quarters."

Driven by the combined forces of increasing bets on Fed rate cuts and the investment frenzy around artificial intelligence in the stock market, the U.S. benchmark index - the S&P 500 index - has repeatedly hit all-time highs this year and is currently near its historical peak. However, in addition to strong earnings expectations for the Q2 earnings season, profit expectations for the next 12 months have never been higher.

During the first quarter earnings season, investors had a lukewarm response. Despite as many as 80% of S&P 500 index component companies reporting profits better than expected, according to median Bloomberg Intelligence compiled data, stock prices on the day of earnings announcements performed about 12 basis points lower than the benchmark index Goldman Sachs strategists, including Cosin, stated that this time, Goldman Sachs' confidence index is near its historical high.

"Investors are still focusing on artificial intelligence, although the optimistic sentiment for cyclical earnings growth has moderated," the team led by this strategist said. "Therefore, the stock price reward for 'better-than-expected performance' in the second quarter earnings season should be below average, and may not be as extreme as the return rate in the first quarter."

Under the increasingly strict trend of market expectations, "victim star stocks" have emerged

Micron Technology (MU.US) can be described as a "victim star stock" under the increasingly strict trend of market expectations. Even if Micron's latest performance does not score a perfect 100, it can definitely score 95, and even in the eyes of some investors, it can score 99. However, Wall Street has sold off Micron significantly after the strong financial report, simply because this storage chip giant's performance expectations appeared to have insignificant "flaws" in the previous few quarters, showing that even minor flaws under the extremely high expectations of the market for this chip giant could severely impact the stock.

After the largest U.S. computer memory chip manufacturer Micron announced its latest financial report, the stock price dropped more than 7% on the trading day following the financial report release. The quarterly performance data and outlook of the company both show an incredibly strong financial foundation. In the midst of the frenzy of global enterprises investing heavily in AI, the demand for storage chips has entered a phase of rapid growth.

Benefiting from the frenzy of global enterprises investing heavily in AI technology, the almost endless demand for HBM storage systems, as well as the strong demand for enterprise-side data center DRAM and NAND storage, Micron has fully benefited from this unprecedented AI investment frenzy since 2023, with a surge of up to 165% since 2023.

However, Wall Street has very high expectations for this financial report and outlook. Analysts expect not only a continued surge in HBM storage demand, but also anticipate that the "year of AI PCs and AI smartphones" starting in 2024 will drive the storage demand of these two major traditional markets into an explosive growth stage. Although Micron's core performance indicators have all exceeded expectations, the outlook for the next quarter's performance did not meet the extremely high expectations of some investment institutions on Wall Street.

In the third quarter of the 2024 fiscal year ending on May 30, Micron's total revenue scale achieved a significant growth of 82% to $6.81 billion. However, regarding the performance expectations for the next quarter, the company stated in the outlook section of the performance announcement that it expects the revenue scale for the fourth quarter to reach $7.4 billion to $7.8 billion. The average analyst expectation is around $7.58 billion, which is basically in line with the average expectation. However, some analysts expect over $8 billion, which is also an important logic for the sharp decline in Micron's stock price after announcing the outlook, such as Citigroup, a major Wall Street bank, listing Micron Technology as a "top pick."

, with an expected revenue of over 8 billion USD in the fourth quarter.

If tech giants fail to meet expectations, the S&P 500 index may experience a significant pullback

As the stock market enters the second half of the year, more and more Wall Street analysts are concerned that the market's sector breadth is still too narrow, and the excessive expansion of chip stocks such as NVIDIA (NVDA.US) may eventually trigger the bursting of the "AI bubble", as well as the overall upward trend of the S&P 500 index being overly dependent on large-cap tech stocks with high weights. From a more macro perspective, the main challenges that the S&P 500 index may face in the second half of this year are the significant slowdown in the US economic growth, which may even lead to a substantial downward revision of overall EPS expectations for US companies, among other unfavorable factors.

Therefore, even with the strong push from large-cap tech stocks such as NVIDIA, Google, and Microsoft, the US stock market has just ended a robust second quarter, prompting more and more Wall Street analysts to be increasingly cautious about the stock market performance in the second half of the year.

So far, the factors that have driven the rise of the S&P 500 index and the expansion of overall EPS expectations have not changed significantly, still led by the "Magnificent 7" spearheaded by NVIDIA and Microsoft. The "Magnificent 7" includes: Apple, Microsoft, Google, Tesla, NVIDIA, Amazon, and Meta Platforms. Global investors have been flocking to the Magnificent 7 in 2023 and the first half of 2024, mainly because they are betting on the best position for these tech giants to expand revenue through the use of artificial intelligence technology, given their huge market size and financial strength.

According to their recent research reports, their main concern is that if macroeconomic factors lead to large tech companies such as Microsoft, Google, and Apple failing to meet the market's extremely optimistic expectations, these high-weighted tech stocks may drive the S&P 500 index into a significant pullback phase.

In the second half of 2024, the total market value of the seven tech giants in the US exceeds 10 trillion USD, making the seemingly lukewarm US stock market look hot. If these tech giants and important chip companies fail to meet the market's high expectations, it may trigger a wave of declines.

Marko Kolanovic, a strategist from Morgan Stanley, emphasized that with the impact of slowing economic growth, high earnings expectations for the overall EPS of US stocks facing downward revisions, among other unfavorable factors, the S&P 500 index may decline in the coming months. In the mid-year outlook on Friday, the chief market strategist of Morgan Stanley and his team stated that by the end of the year, the S&P 500 index is expected to fall to 4,200 points, a decrease of about 23% from the Thursday closing point of 5,483 points. Kolanovic's view actually reiterates his prediction for over a year, despite other Wall Street institutions raising their point forecasts for the S&P 500 index to keep up with the market's surge