Big tech will face incremental challenges: Strategist

The "Magnificent Seven" — Amazon (AMZN), Apple (AAPL), Alphabet (GOOG, GOOGL), Nvidia (NVDA), Meta (META), Microsoft (MSFT), and Tesla (TSLA) — have been significant drivers of the market this year, with Nvidia leading the charge. As Nvidia gears up to report its latest earnings, many on Wall Street look to see how it may test the strength of the market.

Barclays Head of US Equity Strategy Venu Krishna joins Catalysts to discuss where the broader market is headed after Nvidia's earnings and how investors should frame the current economic landscape to manage their portfolios.

"If I look at Big Tech as a group and you look at the extent to which the earnings surprises have been happening in the last few quarters, they've been coming down. So if you go two quarters ago, it was almost 14 plus percent, and then last quarter is about 8, 8.5. So now it's inching lower. That's not because they're not doing well. It's because a lot of the upside and optimism is getting baked into analysts' earnings estimates ... So to your point what it does mean that going forward, the ability of these drivers of the market to continue to surprise and raise gets more challenging, right? So we do think that going forward it does get incrementally challenging," Krishna tells Yahoo Finance.

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

This post was written by Nicholas Jacobino

Video transcript

And video, already hitting a fresh record high this week ahead of its earnings, while the Vicks closed at its lowest level in five years.

So volatility, low major industries hovering near record highs, could and video be the fuel for the next wave of optimism in the market here to break it down.

For us, we have Venu Krishna.

He is Barclay's head of US equity strategy, and he joins us here in studio.

It's great to speak with you.

Thank you for coming in.

I mean, talk to me about the signal that NVIDIA's earnings could have for the rest of the market and what folks should be looking at within the earnings and just more broadly as a signal for where the market might be heading.

Listen, NVIDIA's earnings are very important because in general, if you look at what has been critical to S and P's rise, it's been big tech and NBD is a critical component, probably the most important component of that subgroup of just six stocks.

And if you look at even, for example, what the market is pricing in the options market, for example, it's it's unbelievable that, uh, the the most things which the market cares about right now is the CP I print, followed by NVIDIA earnings and then the non farm payrolls over the next month.

So that just tells you how important.

Uh, NVIDIA also is in the big scheme of things, right?

But that said, I think at least in the options market, it's pricing less of an upside for NVIDIA in this earnings compared to the last earnings.

But remember, this is a 2.3 trillion plus stock.

What does that tell us just about future earnings growth and what exactly that is going to look like if we are starting to see it slow?

Just a little bit?

Obviously, NVIDIA has certainly been an outlier in terms of the tremendous growth astronomical growth that they had seen over the last four quarters.

But what does that tell us?

Just maybe, will we start to see more of this return to normalisation?

What does that ultimately then mean for the broader market as well?

So I would say to some extent, you're already seeing that right.

If I look at big tech as a group and you look at the extent to which the earnings surprises have been happening in the last few quarters.

Uh, they have been coming down.

So if you go two quarters ago, it was almost 14 plus percent, then last quarter is about 8 8.5% so now it's inching lower.

That's not because they're not doing well.

It's because a lot of the upside and optimism is getting baked into analysts earnings estimates, right?

So, to your point, what it does mean that going forward, the ability of these drivers of the market to continue to surprise and raise gets more challenging, right?

So we do think that going forward, it does get incrementally challenging.

But it's also a fact that over the next probably call it 2 to 4 quarters.

The visibility is quite high, including for NVIDIA.

So when we talk to a fundamental analyst, they are fairly confident where it starts.

Getting a little blurred is when you start going a year from now, what is the end state that is still unknown because of the torrid pace at which it's been growing?

What would, uh, that's really interesting to me?

What is going to help us inform what our market is looking like a year from now the most I know you talk through a couple of different things things like CP I and video earnings payrolls being big catalyst for the market.

Which of those is the biggest thing that you think will help us understand a year from today?

I think one thing certainly is the CP I number, and I wouldn't just put it directly on CP I Right now, the equity markets sensitivity to CP I prints is the most negative it's been in 25 years.

So in other words, the market does care a lot.

And I think one of the channels in which it's going to percolate into the equity market is to the rates market.

So if the 10 year curve treasury curve starts moving, the wrong direction that is it's come down recently starts going up, and especially once it starts getting closer to the 5% threshold, you can see the equity market getting a lot more antsy, right, so so that's one.

The other thing I think which is very important to the equity market, is fundamentals.

Actually, they are improving, right?

That's what Q one showed, which is a very very healthy sign.

But the expected broadening has been just about incremental.

So I think what one would have liked to see is.

Is the broadening outside of tech especially big tech indeed happening?

And is it gaining pace?

So there's some very early green shoots of that.

But I think a lot more needs to happen to get comforter on that level because we've been dragged up by big tech quite substantially thus far.