According to a recent analysis by strategists at Morgan Stanley, there has been a significant increase in discussions about cost control on earnings calls among US companies. This surge in conversations is driven by a desire to redirect funds and make investments in innovative technologies.
Literary mentions of “operational efficiency” are the highest ever in the U.S. this earnings season, as companies focus on cost control but also invest in technologies “that can drive future productivity, such as artificial intelligence,” the group led by Michael Wilson wrote in a note. .
Strategists said there is considerable overlap between the industries most commonly discussing operational efficiency and those discussing AI. These groups include software, professional services, healthcare services and financial services.
Pfizer Inc., BlackRock Inc. and Lam Research Corp. were among the S&P 500 companies that touted operational efficiency in their earnings calls this season, according to data compiled by Bloomberg.
The growing focus on cost control comes as companies look to protect margins from an expected soft economic downturn. Investors have been looking for signs of a cooling labor market to gauge when the Federal Reserve will lower borrowing costs, even as recent hot data has indicated the Fed won’t be easing up anytime soon.
Cost management has been the main theme of this season. The Walt Disney Co. said this year’s profit will rise by at least 20% thanks to cost cuts. Hertz Global Holdings Inc. is looking to cut costs, and Levi Strauss & Co. said the new initiative to increase efficiency includes cost-cutting measures such as job cuts.
Some companies reallocate these funds to grow their business. Estée Lauder Cos. is cutting jobs as part of a restructuring plan to help it respond more quickly to new beauty trends and invest more in its brands. Meta Platforms Inc. is spending aggressively on AI development, while Amazon.com Inc. is cautious about new investments.
On the AI front, all eyes are on Nvidia Corp., which is expected to report later this month. This season, Arm Holdings Plc soared as AI spending helped bolster the chip designer’s forecast. Palantir Technologies Inc. also benefited from strong demand for its artificial intelligence technology.
The bar is high for Nvidia, which has been the biggest beneficiary of the AI trend. Analysts estimate that earnings per share will increase by 602% in the fiscal year ended January 31 from a year ago. The Magnificent Seven’s megacap tech stocks, including Nvidia, need to generate huge gains under various strategies to continue outperforming the broader market.
Morgan Stanley’s Wilson recently listed Nvidia, Apple Inc., Microsoft Corp. and Alphabet Inc. in a box of high-quality growth stocks with overweight ratings from analysts at the bank. He is positive about this group of high-quality stocks, as well as those that offer high operational efficiency as an extension.
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