In a note Thursday, Barclays analysts cautioned that the tech sector appears very expensive despite another quarter of better-than-average earnings surprises.
They noted that the S&P 500 reported an EPS surprise of +7.8%, significantly surpassing the pre-pandemic average of 5.24%, with 80% of companies beating consensus estimates, a notable improvement from historical averages.
"Once again, the S&P 500 delivered better than average EPS surprise... coming in at +7.8%, well above the 7-year pre-pandemic average of 5.24%," wrote the bank.
Tech remains a standout, leading with a nearly 90% beat-to-miss ratio, followed by Healthcare and Consumer Staples. However, the performance was not uniform across all sectors, with Energy, Utilities, and Materials frequently missing estimates.
In addition, Big Tech played a crucial role in the S&P 500's overall margin recovery, driving positive operating leverage for the third consecutive quarter.
Barclays stated, "Big Tech remains central to the S&P 500's margin recovery story."
Furthermore, Barclays explains that while the fourth quarter of 2023 saw mixed results for Big Tech—with strong year-over-year EPS growth offset by smaller-than-average EPS beats—the first quarter of 2024 reversed this trend. Although year-over-year growth slowed from +63% in 4Q23 to +56% in 1Q24, the average EPS beat rebounded, particularly boosted by NVDA and GOOGL.
Despite the strong earnings performance, Barclays highlights that most sectors, particularly Tech, are trading at or above full valuations.
"The overall Tech sector looks very expensive relative to both long-term and pre-COVID valuations," Barclays emphasized. However, "Big Tech is trading at a notably smaller premium thanks to very strong implied earnings growth."