Key Takeaways
- This week could be the biggest one of the earnings season, with Microsoft, Apple, Amazon and Meta scheduled to report earnings.
- Any big moves in these stocks would impact major stock indexes, and markets may be on edge after earnings reports from Tesla and Alphabet sent tech stocks soaring last week.
- Poor performance from big technology companies this week could widen the cracks that began appearing last week.
- Investors will also be keeping an eye on capital spending from Microsoft and Amazon after Wall Street rallied against Alphabet's AI investments.
Stock markets have been volatile in recent weeks and could see further volatility this week as most of the Magnificent Seven report earnings at a key milestone for the group.
Bank of America expects more than a third of S&P 500 companies' combined earnings to be released this week. That's mainly because Microsoft (MSFT) reports earnings on Tuesday afternoon, Meta (META) reports after the market closes on Wednesday, and Apple (AAPL) and Amazon (AMZN) are both scheduled to report after the close on Thursday. These four companies make up about 20% of the S&P 500, roughly the same as the healthcare and industrial sectors combined.
Big moves in these stocks will likely drag down the major stock indexes as well.The market may be on edge heading into earnings reports this week after earnings reports from Tesla (TSLA) and Alphabet (GOOGL) sent tech stocks soaring last week, leading the sector into a correction and helping the S&P 500 post its worst day since December 2022.
Weak earnings performance from big tech companies this week could widen the fissures that began appearing last week and also add to or challenge the debate over spending on artificial intelligence, or AI, which has weighed on sentiment recently.
AI Spending Concerns Gain Focus
The Magnificent Seven are expected to report a 30% increase in profits from the second quarter of last year, when profits topped $81 billion, according to Bank of America Inc. That would be a slower pace than the previous quarter but still well ahead of the 6% profit growth for the S&P 500 index.
Two of the companies reporting earnings this week, Meta and Amazon, are expected to be the biggest contributors to overall earnings growth in the S&P 500 index. But Alphabet's earnings last week showed that strong profit growth alone may not be enough for Wall Street.
Alphabet reported a 28% increase in second-quarter profit, beating analysts' expectations, but its shares tumbled as investors focused on capital spending. Google is investing heavily in AI infrastructure to catch up with cloud-computing rivals Microsoft and Amazon, with capital spending nearly doubled from last year. Alphabet CEO Sundar Pichai defended the company's spending, saying the risks to Google of underinvesting in AI are greater than the risks of overinvesting.
“Capex rates are certainly rising,” CFRA analyst Angelo Gino said, “but in our view, the rise in capex rates shouldn't be viewed as a disappointment. We believe this is healthier spending than increased opex, which these companies are not necessarily seeing.”
Still, spending continues to weigh on the tech giants. “Second-quarter job openings are down, and while rising legal and capital spending are risks, we don't expect a repeat of last quarter's FY24 spending outlook,” Bank of America analysts said in a forthcoming Meta report.
Focus on AI monetization
Amid concerns about the costs associated with AI, executives may be eager to highlight how AI is already delivering increased revenue and profits.
“There's a misconception among some of these companies that they're not monetizing. [AI]” Gino said, noting that Microsoft grew its Azure and cloud services business by 30 percent in the first quarter, with about 7 percent of that coming from AI services. “The problem is that it's happening at such a low level that it's not having a significant impact on the overall business,” he added.
Beyond the growth of the cloud, Zino said AI could benefit these companies in ways that are harder to quantify: “We've seen digital ad spend accelerate this year, and I think part of that is because of platform improvements.”
Will the market rotation continue?
The latest results from big technology companies came amid a major market reversal as tech stocks, which drove the market to record highs earlier this year, have been forced into a correction as investors shifted money to smaller caps on hopes that they might benefit from impending interest rate cuts.
Meanwhile, Wedbush analysts are less worried about increased spending by hyperscalers. “We believe this tech sell-off will be short-lived as Wall Street gets a better understanding of the overall tech sector's performance and commentary,” the analysts wrote in a Thursday note.
Gino also suggested that while further rotation may be on the way, the decline in tech stocks could be temporary and present a “great opportunity for long-term investors.”
