Semiconductor giant Taiwan Semiconductor Manufacturing reported its first decline in profit in four years. The problem stems, in part, from weaker demand for smartphones and personal computers. Charles Schwab Senior Investment Strategist Kevin Gordon notes that earnings expectations have already been cut for the tech sector from a year ago. “Certainly the outlook for 2023 has come down a lot, down to one percent, but I think it’s more about the outlook for ’24 now that those stocks have been looking at,” Gordon tells Yahoo Finance Live.
Video Transcript
– We want to switch gears and zero in on tech a little bit more here through the lens of one particular subgroup within technology.
The world’s largest chip maker, TSMC, reported its first drop in profits since 2019. That was yesterday. As global economic headwinds took a toll on chip demand, the major Apple supplier also lowered year-end revenue estimates.
And as we do start to get big names like Meta, and Microsoft, Alphabet, they prepare to report earnings next week, what should we learn from this demand slump for chips? What does it mean for big tech’s outlook?
With us now, Kevin Gordon, still with us. Kevin Gordon, Charles Schwab Senior Investment Strategist. Kevin, semiconductors are frequently looked at leading tech and then tech leading the market.
TSMC is not everything. We heard from ASML as well. We haven’t heard from that many of the chip makers. But what can we extrapolate?
KEVIN GORDON: I think, well, certainly looked at as a bellwether for overall growth. But I think what’s been interesting is you’ve still seen a pretty healthy split, which I think, it makes sense because of just the backdrop of the economy, goods versus services.
But if you want to kind of put semis in the goods category just because of the nature of chips versus tech services, if you kind of break it down that way, the forward earnings outlook for the services part of tech has actually continued to move higher. And you haven’t gone through as much of a stumble as the chips did.
So you’ve had a pretty healthy bifurcation there. But again, I think it speaks to the backdrop that we’ve been in. So if forward earnings for semis can continue to move higher, and I’m talking next year out, not just the next quarter out, I think you still directionally, probably, have a more solid trajectory for those parts of the market.
But certainly, if you continue to see estimates move lower, if guidance gets cut, then you probably have a little bit of a weaker story.
And you know, for the tech sector in general, I think it’s notable that a year ago, there was an expectation that 2023 earnings for tech were going to grow by about 12%. That’s now been cut to 1%. So you’ve had a huge revision lower.
– And is the AI hype train kind of too much? When you think about like the chairman of TSMC said– he had a quote where he talked about the short-term frenzy about the AI demand not being able to extrapolate for the long term.
And you’re still seeing the effect of weaker demand for software and that having a knock-on effect in terms of chips. And AI is just not there yet in terms of the demand picture?
KEVIN GORDON: Yeah. I think it’s probably a long-term solution probably for longer term problems. I don’t know if we can apply it to a short-term problem. Whether it’s productivity growth, which we’re really struggling with right now.
But if that helps from a labor picture, then, yeah, I could see it being a huge benefit in the future. But it’s tough to extrapolate that and just to attribute any particular segment of the market’s growth right now just to AI.
Plus, I think AI is just this really big net that people tend to throw. And there’s a lot more nuance to it, I think. And the last thing I’ll say is I don’t think that it’s just the tech sector that benefits from this.
I think you have to look at the opportunity set across all sectors. And those who are the beneficiaries not necessarily on the supply side of it. I think that’s going to be an important distinction, not for the next month, but for the next couple of decades as this really takes hold.
– I want to pick up on something that you were saying a moment ago, which is that we are now seeing a growth forecast for tech of 1%, which is very different than what the growth forecast was a year ago. But the stocks are a lot higher than they were a year ago.
So there’s a little bit of– there’s a problem with that picture. So what does that imply about how big tech is going to do? I mean, we got a little taste of it with Tesla and Netflix. What does that imply for how the sector’s going to do?
KEVIN GORDON: I think, actually– I mean certainly the outlook for ’23 has come down a lot, down to 1%. But I think it’s more about the outlook for ’24 now that those stocks have been looking at.
Which there is this expectation, not just within tech, but across the board for the market entirely that you’re going to get this pretty miraculous recovery.
– Is it right?
KEVIN GORDON: –for earnings growth.
– Yeah.
KEVIN GORDON: It’s too– it’s just so soon to tell. I mean, back to the example of last year, earnings growth for the year was expected to be pretty good. We’ve seen revisions come down substantially.
I think you also have to look at it sector by sector. And the one thing that fascinates me is we often lump stocks into the growth category or the value category.
You take two of the best performers year to date, tech and communication services. Revisions for tech, significantly down. Revisions for communication, services up. There’s a huge split between the two.
So you often think of these two as heavy growth sectors, which typically, they are. But they’re exhibiting two completely different earnings trends. I think you have to be much more nuanced.
– Is the Magnificent Seven still the winner in this space when you think about, you know, where tech is going?
KEVIN GORDON: I mean, it could be. I don’t think that there’s any reason that they don’t need to be. But I will say there’s been, now, more of a decisive split between their share in market cap terms and then their overall earnings share.
And one of the concerns– not in a super negative way, but one of the concerns I’ve kind of had more recently is that we’re no longer living in the shutdown era.
We’re no longer just living in the ecosystems of only those companies. So it gets harder to justify their weight in an index if they’re not catching up from an earnings perspective.
So if that catches up then, yeah, I think it’s justified. But over time, it’d be healthy, in our view, to have a little bit of a convergence there, as we were talking about at the beginning of this show, and then the rest of the market starts to catch up.