Rising tech spending intent points to AI driving strong earnings

A gauge of tech spending intent by corporations and consumers hit a two-year high in the first quarter, suggesting strong earnings ahead for companies serving the AI market.

S&P Global Market Intelligence 451 Research's US Technology Demand Indicator rose to 52.11 this year, 12% higher than the comparable period last year. A value above 50 indicates expansion. The TDI is a survey-backed composite of US intent to spend on technology and typically predicts revenue performance for tech vendors by up to a few months.

"An increase in Tech Demand Indicator score in Q1 continues a trend of gradually improving sentiment that stretches back to the beginning of 2023, and puts expectations for 2024 in a positive light," 451 Research analysts Liam Eagle and Malav Parekh wrote in a report.

The increase has largely been driven by enterprise spending on artificial intelligence and related technologies like cloud infrastructure, data management and analytics, and information security. Consumer spending intent remained flat year-over-year amid signs of elongated tech replacement cycles.

Revenue growth for companies in the S&P 500 IT Index strongly accelerated in the final quarter of 2023, according to data from S&P Global Market Intelligence. A rise in tech spending intent indicates that another strong earnings season is on the horizon, especially for those benefiting from increased interest in AI.

Companies benefiting from bumper demand include AI chipmakers such as NVIDIA Corp., Broadcom Inc. and Arista Networks Inc.; cloud infrastructure providers such as Microsoft Corp. and International Business Machines Corp.; and cybersecurity companies such as Palo Alto Networks Inc.

More than half of top-performing IT stocks this year are connected to AI, according to an S&P Global Market Intelligence analysis. Meanwhile, tech consumer stocks such as Apple Inc. have posted more lackluster results and stock performance.

There is a "widespread understanding among businesses that AI technologies — closely connected to and in some cases inseparable from data and analytics projects — are likely to have a major impact on their operations in the near future," Eagle and Parekh said.

Despite the excitement around AI spending, the 451 analysts note that companies remain cautious due to lingering concerns over inflation and interest rates, as well as uncertainty associated with the conflict in the Middle East. As a result, they expect a flattening of the spending intent curve in the second quarter.

451 Research is a technology research group within S&P Global Market Intelligence.