Assessing the 'Positive Surprise' Trend in the Last 5 Quarters of the Technological Industry
As the second quarter earnings season for 2025 unfolds, the tech sector is poised to deliver more surprises, albeit with a pattern of positive but somewhat moderated earnings per share (EPS) growth compared to historical averages.
In the first quarter of this year, an impressive 77% of S&P 500 companies beat their EPS estimates. However, the magnitude of these upside surprises was modest, with an average EPS surprise of +7.7%, slightly below the five-year average of +8.8%.
The tech sector, particularly the "Magnificent 7" tech giants - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla - have been the driving force behind this positive EPS growth and surprises, despite a broad-based earnings slowdown elsewhere.
Analysts remain optimistic about certain tech stocks with potential for strong EPS growth and upside. For instance, Dell and Spotify are expected to show robust EPS growth and upside potential, driven by artificial intelligence (AI) revenue and steady subscription models, respectively.
While full-year EPS growth estimates for 2025 were revised lower overall for the S&P 500 (from 11.6% to 9.0%), there is growing confidence that Q1 was the low point, and guidance for Q2 and beyond is more constructive, suggesting a rebound in EPS growth and potential for upside surprises to return more strongly for tech.
Looking back at the past five quarters, tech sector EPS growth has been accompanied by a high frequency of upside surprises, though the size of those surprises has been somewhat moderate recently. The tech sector's EPS upside surprise factor has been diminishing in the last 5 quarters.
In terms of revenue growth, the tech sector has shown a consistent upward trend. Q1 '24 saw revenue growth of 7-8%, but this has increased to the mid-to-high teens for the last three quarters. Q1 '25 saw an expected revenue growth of +11.3%, which actually grew by +13.3% for a 200 bp upside surprise.
Similarly, the Q2 '24 revenue growth was expected to be +6.7%, but actually grew by +11% for a 430 bp upside surprise. The Q3 '24 revenue growth was expected to be +12%, but actually grew by +13.1% for a 110 bp upside surprise. Q4 '24 revenue growth was expected to be +11.1%, but actually grew by +12.1% for a 100 bp upside surprise.
The expected EPS growth for the tech sector in Q2 '25 is in the "high teens". The breakout in the Nasdaq Composite and the Nasdaq 100, along with the S&P 500, is a positive sign for the tech sector's continued growth.
Despite the challenges posed by Covid, interest rate hikes, and tariffs over the past five to six years, the tech sector has managed to maintain its growth trajectory, offering promising opportunities for investors.
Investing in the tech sector, particularly in companies like Dell and Spotify, could yield strong earnings per share (EPS) growth, given their potential to deliver robust growth driven by artificial intelligence (AI) revenue and steady subscription models, respectively. The emerging patterns suggest that the tech sector is expected to deliver a higher frequency of EPS upside surprises in Q2 2025, despite a somewhat moderated earnings growth compared to historical averages, thanks to the continued growth trajectory and the positive impact of technology on finance.
