Without the positive earnings trend that has stemmed from AI and technology companies, global markets would have seen negative earnings revisions this calendar year to date, according to State Street Global Advisors.
Namely, global communications have seen upgrades of 3.1 per cent since the start of the year, with technology and discretionary following behind as the only other sectors to break into positive territory at 2.8 per cent and 1.5 per cent, respectively.
Energy, meanwhile, saw the biggest negative revision in February, at a downgrade of 7 per cent, followed by a 4.1 per cent downgrade for materials.
These trends, State Street said, are expected to continue through 2024.
However, the firm added that the AI theme, which has dominated global markets, has had less impact on the S&P ASX 300 Index.
During the February reporting season, the S&P ASX 300 Index, in aggregate, had a 0.3 per cent decline in earnings expectation.
While this figure may lay in the red, State Street said that the wide range of outcomes across sectors paints a different picture, with the largest earnings upgrade seen in technology, revised to 5.2 per cent for the next 12 months.
“In contrast the energy, communications and materials sectors have seen the largest downgrades,” State Street observed.
“The contrast between the Australian and global communications sector is largely due to the different make up of stocks – AI has yet to move the dial for large cap Australian communications companies.”
Last month Fidelity International addressed whether the artificial intelligence rally is demonstrating signs of a nascent bubble, noting parallels between the meteoric rise of Nvidia against that of Cisco in the late ’90s.
However, the investment manager believes it is not yet time for investors to worry, although similarities might exist.
In February, Nvidia reported earnings grew 22 per cent from the previous quarter to US$22.1 billion, rising 265 per cent from a year ago.
It shared optimism for the underlying technology and forecast revenue to hit $24 billion, plus or minus 2 per cent, for the first quarter of fiscal 2025.
Tom Stevenson, investment director at Fidelity International, noted that in the case of Nvidia and Cisco, “the share price trebled in a matter of a few months, then paused for breath for a few months more before turning left up the page as the fear of missing out sucked in the doubters”.
“Both companies’ shares increased sevenfold in less than two years. Nvidia remains close to its all-time high, and what happens next is one of the most important questions in investment right now,” he said.
However, Stevenson warned that a final sign that we may be in a bubble is when investors, flush with their stock market gains, look for opportunities in other risky assets.
Interestingly, State Street revealed in its reporting season outlook that higher beta stocks outperformed lower beta stocks, with the former seeing average returns of 6.9 per cent in the top quintile.
Claiming that the most interesting aspect of the reporting season has been the “junk” or “risk on” rotation, State Street highlighted that – in addition to high beta – small, lower quality, and the most shorted securities outperformed over the period.
