In a head-snapping moment last week, President Trump slapped new export license requirements on U.S. chip firms just a day after he praised Nvidia (NVDA) for a blockbuster investment in domestic manufacturing. Nvidia shares whipsawed from 1% gains to 6% losses overnight.
That came less than a week after Reuters reported that Apple (AAPL) had airlifted 600 tons of iPhones to the United States from India to beat Trump's "reciprocal" global tariffs. Trump then delayed that policy on all countries besides China for 90 days, making Apple's last-minute flights look like a waste of fuel.
These are volatile times for the tech sector, which was already well off last year's highs before the "liberation day" tariff announcement of April 2 and all the confusion that followed. The biggest tech firms start to share earnings this week and next after a rough quarter that featured double-digit share losses. Though analysts expect solid first-quarter profit growth, there's concern about the outlook due to changing U.S. trade policy and what economists see as higher chances of an economic slowdown.
As with most sectors, focus is likely to be less on what just happened and more on the near future. However, tech executives may have little clarity until U.S. trade policy gets less hazy. The trade situation raises fundamental questions, including how long "hyperscalers" can continue plowing money into AI chips, and whether Apple's iPhone business will take a major blow from a U.S./China trade war despite Trump's recent exemption of products like phones from the tariffs—for now. None of these questions will necessarily be answered over the next few weeks, potentially leaving tech market investors in limbo and likely discounting anything that happened before April 2.
"If Apple ends up reporting strong iPhone sales, investors will likely wonder whether is it a 'pull-forward' or a true indication of demand," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "If they have strong results, there's a good chance it will be viewed as a temporary demand spike to secure 'pre-tariff' phones. This could be a consideration at the corporate level as well. For example, if businesses believe they'll be subject to tariffs on Dell servers, they might decide to make the purchase now rather than wait and see what happens with trade. Therefore, to what extent can we trust results in the tech sector if they come in robust?"
Even if some tariffs get renegotiated before the 90-day delay expires in mid-July and companies like Apple make headway with Trump over China, tech could face headwinds from overall trade-associated economic weakness. Major banks warned of higher recession odds, and Goldman Sachs (GS) CEO David Solomon told analysts on the company's earnings call last week that "economic activity is slowing down around the world."
Slower economic activity could mean less sales of physical items made by tech companies including phones, semiconductor chips, and servers. It also might mean a dip in AI and cloud spending that drove so much of the 2023–2024 rally in the sector. There's also potential bad news for companies like Meta Platforms (META) and Alphabet (GOOGL), which derive so much of their revenue from advertising.
"Digital ad spend is one of the first places to get cut if there are concerns about economic growth," Schwab's Peterson said. "Maybe that will show up in revenue guidance."
For the first quarter, FactSet sees tech earnings per share rising 14.9% from a year earlier, with revenue up 11%. Both would be well ahead of overall S&P 500 earnings and revenue growth. Strength is seen spilling into the second quarter as well, with info tech earnings forecast to rise 17.9% from a year ago. But keep that number in mind and recheck on June 30 for updates. By then, it might be lower if tariff uncertainty remains.
Keep in mind, too, that strong margins in the semiconductor industry contribute heavily to analysts' earnings growth expectations, which would be in the single digits for tech if that one area wasn't included. That means overall growth is far less in areas like software, technology hardware, and storage. In other words, investors whose portfolio includes certain tech stocks but not the chipmakers might see far less earnings growth potential than the 14.9% FactSet estimate.
Many keystone tech products like the iPhone and Microsoft Windows generate huge revenue but relatively slow growth compared to items like Microsoft's (MSFT) Azure cloud and Nvidia's AI chips. For instance, fourth-quarter sales growth for Microsoft's More Personal Computing unit, which includes Windows, Bing, Surface, and Xbox, saw flat revenue from a year earlier. iPhone sales dropped slightly in the fourth quarter and could face more tough sledding in the first quarter after Apple announced in March that it had to delay several of its Apple Intelligence features for Siri.
Investors wondering whether the recent dip in tech stocks lowered valuations to more typical levels may be disappointed. The tech sector's trailing 12-month price-to-earnings (P/E) ratio was recently 36.29, the third highest P/E for the 11 S&P sectors and well above the 28.25 P/E of the Nasdaq-100® (NDX) as tracked by The Wall Street Journal. This suggests tech still is highly valued heading into earnings. That said, the sector's forward P/E—which tracks the value of stocks versus analysts' estimates for the next 12 months of earnings—has fallen markedly since the start of the year. But with companies possibly prepared to shave or withdraw guidance in coming weeks amid tariff uncertainty, there's a chance "P" could remain high relative to "E."
Besides tariffs' potential impact on the economic outlook, here are three things to watch as tech firms report, starting with Alphabet and Intel (INTC) late this week and followed by Microsoft, Apple, Qualcomm (QCOM), and Meta Platforms next week.
1. Cloudy outlook: The cloud market, which reaccelerated last year, slowed somewhat in the fourth quarter. Worries about a global recession could hit it harder, with cloud customers less likely to raise spending on data storage without knowing how much their own customers might need. At some level, however, tariffs could be a blessing for the cloud because companies might be tempted to put more of their data there rather than buying physical servers that could grow pricier due to tariffs. Overall, however, the cloud business is cyclical, reflecting the ups and downs of companies around the world far beyond the tech sector, and tech companies have little control over those fluctuations in demand. In its most recent quarterly earnings, Microsoft's Azure cloud business growth topped 30% year over year but still disappointed investors, who'd come to expect even loftier cloud business growth. Revenue from Azure and other cloud services at Microsoft rose 31% in Q4, a deceleration from 34% the prior quarter. Amazon Web Services, the biggest cloud business, grew 19%, accelerating from 13% a year earlier. And Alphabet's cloud revenue rose 30%. Those big-three cloud companies face high expectations for Q1, but what they say about future cloud growth may matter more.
2. AI spending: Heavy spending by hyperscalers like Microsoft, Amazon (AMZN), Meta Platforms, and Alphabet showed no sign of slowing in the fourth quarter despite some analysts predicting it had to die down at some point. As recently as late February, Reuters reported that Meta was in discussions to construct a new AI data center campus with costs potentially exceeding $200 billion. Earlier in the first quarter, Meta said it planned between $60 billion and $65 billion in capital expenditures this year for AI. Meta CEO Mark Zuckerberg said he continues to believe heavily investing in the company's AI infrastructure will be a strategic advantage. "It's possible that we'll learn otherwise at some point, but I just think it's way too early to call that," he said, according to CNBC. Microsoft said it planned $80 billion in AI spending this fiscal year. The question is whether any of these firms announce a pullback or simply keep spending the same rather than raising it. "If mega caps maintain their AI spending, does the market view that as good or bad?" Schwab's Peterson said. "Normally you spend heavily at the start of a business cycle, and we are at the start of the AI cycle. But on the flip side, with the possibility of a large economic contraction, you want to be conservative with your approach. Do you really want to put your foot to the pedal now?"
3. Tariff impact on supply chains: The 90-day tariff delay announced by President Trump simply pushed back a possible day of supply chain reckoning for the tech industry, unless complex negotiations make quick progress. And with 90 days to revamp trade relations with dozens of major partners, odds look relatively good that uncertainty will still be around in three months. Additionally, the 145% U.S. tariffs on goods from China accompanied by a retaliatory 125% tariff by China on U.S. goods effectively froze one of the largest tech trading relationships in the world, though it was already hindered by U.S. restrictions on semiconductor exports to Beijing. Apple shares got slammed more than many other tech companies by having both ends of its business wrapped in China. It makes about 80% of its iPhones there and sells 20% there as well. Though Apple has moved some manufacturing to India, that country also didn't escape tariff punishment before Trump announced the pause. Which is likely why Apple did its version of the Marshall Airlift. But flying phones in from India isn't a long-term solution. While Nvidia and Apple have committed to spending billions on transferring some production home, these manufacturing changes take years. Will tech companies have more updates on how they're reworking supply chains to get around tariffs, especially with trade negotiations showing more progress with countries like Vietnam and India than with China? Does that translate to potentially profit-sapping capital expenditures? Those are questions that might be asked on earnings calls.
For the major tech firms reporting this week and next, analysts expect the following:
AAPL: EPS of $1,61. +5.3% from a year earlier, on revenue of $93.97 billion, +3.5% year over year
GOOGL: EPS of $2.01, +6.3% year over year, on revenue of $89.21 billion, +10.76% year over year
MSFT: EPS of $3.22, +9.5% from a year earlier, on revenue of $68.45 billion, +10.66% year over year
META: EPS of $5.29, +12.3% from a year earlier, on revenue of $41.38 billion, +13.5% year over year
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© Charles Schwab
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