US GDP Growth Of 5.2% Is Strongest In 2 Years; Should Tech Stocks Worry And Why?

The US economy has risen strongest since the fourth quarter of 2021. America's gross domestic product (GDP) growth came in at 5.2% in the third quarter of 2023, merrier-than-expected compared to preliminary estimates of 4.9%. However, with the higher GDP growth of the US, many sectors are going to be impacted differently. Technology firms will face jitters about it, while auto and consumer durables sectors to find comfort in it.

As per the "second" estimate released by the Bureau of Economic Analysis, US real GDP increased at an annual rate of 5.2% in Q3 of 2023, compared to 2.1% in the preceding quarter. Notably, before Q3 2023, the country's GDP growth floated between 2% to below 3% till Q3 of 2022 when GDP growth stood at 2.7%. In the first six months of 2022, GDP was negative 0.6% in Q2 and 2% in Q1, which kept the fear of recession on a loop.

However, the latest increase in GDP growth reflected a rise in consumer spending, private inventory investment, exports, state and local government spending, federal government spending, residential fixed investment, and nonresidential fixed investment.

The government data said that compared to the second quarter, the acceleration in real GDP in the third quarter primarily reflected accelerations in consumer spending and private inventory investment and an upturn in exports that were partly offset by a deceleration in nonresidential fixed investment. Imports turned up.

Talking about the latest GDP data's impact, Yogesh Kansal, Co-founder & CMO, of Appreciate, a fintech platform for Savings and investment, said, the US experienced GDP growth that surpassed initial expectations. This is causing a notable divergence in the performance of various sectors.

According to Kansal, higher GDP growth is making technology sector investors uneasy, who fear that the Federal Reserve may delay potential rate decreases. He added, "Consequently, the prices of tech stocks have witnessed a decline."

On the other hand, Kansal believes that this surge in GDP growth has elicited satisfaction among investors in the consumer and automotive sectors. They anticipate increased revenues for companies within these industries due to favorable economic conditions.

Also, the GDP data impacts global markets directly. He said, "Emerging country stock markets, in particular, are likely to be adversely affected because an accelerated US GDP growth suggests an increased likelihood of the Federal Reserve maintaining a high funds rate. This, in turn, diminishes the Equity Risk Premium, contributing to the potential downturn in emerging market equities."

On Wednesday, the day of GDP data, tech-heavy index Nasdaq Composite slipped by 23.27 points or 0.2% to end at 14,258.49. During the trading hours, the index shed at least 141.5 points or 0.99%. Tech biggies like Apple Inc, Microsoft, Google's parent Alphabet Inc, and Amazon shares also fell by 0.5% to 2%.

On Thursday, at home, tech majors like TCS, LTIMindtree, Infosys, Persistent and Tech Mahindra shares were in red tracking global tech stocks. These Indian tech stocks traded near their day's low with downside ranging from marginal to 1.5%. The Nifty IT index fell as much as 153 points or half a per cent to hit an intraday low of 32,455.30.

IT sector in India is already facing pressure from challenging macro conditions which is likely to continue in Q3 as well.

In its latest note, InCred Equities analysts said, "Although the prevalent belief is that large cost take-out deals could benefit Tier-I IT services companies, we heard that most of the vendors are aggressive in the market as a larger number of proposals are of a similar nature. We continue to believe that a few large deals could materially alter the growth trajectory of Tier-II companies, given the favourable revenue scale. However, the quantum of discretionary project roll-offs and vendor consolidation could decide the extent of FY25F upgrades."

Analysts note further added, "Upfronting of costs with likely revenue recognition in 1QFY25F, limited capex resources, and faster discretionary project roll-offs could impact margins, receivables and cash conversion in 2HFY24F and FY25F. Limited travel & hiring (freshers and lateral) and a cut in variable pay could help offset the headwinds..."

Finally, InCred's note added, "Our discussions also indicate that financial services (FSI), manufacturing, and retail customers are planning higher furloughs in Dec 2023F and are expecting a funding winter from their vendors. This, coupled with a significant reduction in discretionary budgets, could impact 3QFY24F execution. Potential weakness in select Tier-II companies from weak execution could be an attractive accumulation opportunity. Tech Mahindra continues to be our preferred stock pick among Tier-I companies.