Axelle Pinon, a member of the investment committee at Carmignac, analyses the focus on AI in terms of revenue generation.
As seven companies have been driving most of the S&P 500 performance, all eyes will be on their ability to deliver on the earnings front to match their multiple expansion.
These companies have very various profiles: Nvidia and Meta have seen upward revisions of earnings estimates for 2023 since the beginning of the year, but investors left their expectations broadly unchanged for the other five, offering no earnings support to justify this strong outperformance. Despite these revisions, the Big Tech firms are still expected to post among the best earnings growth of US companies for Q2 2023. One small miss could lead to a huge disappointment for markets, as proven by Tesla and Netflix already.
The revenue opportunity linked to AI is, once again, the main focus. Last earnings season was all about how often “AI” was mentioned during earnings calls. This time should be more “show me the money”.. Companies with the nearest path to AI revenues should be the ones receiving the best rewards.
For now, Microsoft seems the nearest-term beneficiary of the proliferation of AI. This is based on its controlling stake in OpenAI, which can ideally be utilised within its Azure cloud infrastructure, allowing enterprises to capitalize on AI initiatives, and its plan to incorporate an AI “copilot” into its Office365 software suite – with subscription prices being 1.5x higher than their historical suite.
Beyond AI, efficiency remains a requirement in 2023. For instance, Meta’s strong performance year-to-date has been driven by a management pivot from heavy spend to aggressive cost-cutting while de-emphasising the metaverse strategy. All-in-all regaining some of the credibility among investors that had been lost in recent years. Going forward, emerging growth drivers should gradually become the focus of attention again, but not at all costs as has been the case over the past decade.
[Main image: agence-olloweb-d9ILr-dbEdg-unsplash]
