How this week’s big tech earnings could impact the broader market

Amazon, Apple, Meta and Microsoft will announce quarterly results this week

Key learning points

• This week will bring gains from Microsoft, Apple, Amazon and Meta, in what could be the biggest week of this earnings season.

• Big moves in their shares would impact major indexes, and markets could be tense after Tesla and Alphabet’s earnings reports last week sent tech stocks into overdrive.

• Any weakness in earnings from the big tech companies this week could widen the cracks that became apparent last week.

• Investors will also be closely watching Microsoft and Amazon’s capital spending, after Wall Street weighed in on Alphabet’s AI spending.

The stock market has been turned upside down in recent weeks, and the ride could get even wilder in the majority of stock markets this week Beautiful seven reporting earnings at a crucial time for the group.

Bank of America estimates that more than a third of total S&P 500 gains will be reported this week. That’s largely because Microsoft (MSFT) will report on Tuesday afternoon, Metas (META) results come when markets close on Wednesday, and Apple (AAPL) And Amazon (AMZN) will both report after the bell on Thursday. These four companies account for almost 20% of the S&P 500 index – about as much as the healthcare and industrial sectors combined.

Big moves in their stocks would drag major indices in tow, and markets could be tense heading into this week’s post-Tesla reports (TSLA) and alphabet (GOOGL) income sent tech stocks into a spiral last week, sending the sector into a correction and sending the S&P 500 into its worst day since December 2022.

Any weakness in earnings from the big tech companies this week could widen the cracks that became apparent last week. They can also help weave the story together or challenge it spending on artificial intelligence (AI) That has weighed on sentiment lately.

Concerns about AI spending in the spotlight

The Magnificent Seven is expected to report 30% profit growth over the second quarter of last year, when profits totaled more than $81 billion, according to Bank of America. That would represent a slowdown from the previous quarter, but would still easily outpace the rest of the S&P 500’s earnings growth at 6%.

Two of the companies reporting this week – Meta and Amazon – are expected to be among the biggest contributors to the S&P 500’s overall earnings growth. Still, Alphabet’s results last week showed that robust earnings growth may not be enough for Wall Street.

Alphabet reported profit increased by 28% in the second quarter, exceeding analyst expectations. However, the stock plummeted as investors stepped in capital expenditure, which nearly doubled from last year, as Google invests heavily in AI infrastructure to keep up with cloud computing rivals Microsoft and Amazon. Alphabet CEO Sundar Pichai defended the company’s spendingsaying that the risk to Google of under-investing in AI was greater than the risk of over-investing.

The story continues

“CapEx rates have definitely increased,” said CFRA analyst Angelo Zino. “But the way we look at it, higher CapEx should not be seen as a disappointment. We think spending dollars is healthier than raising them OpExwhich is not necessarily what these companies do.”

Still, the expenses have become a burden for the tech giants. “With job openings declining in the second quarter,” Bank of America analysts said in Meta’s upcoming report, “we do not expect a repeat of last quarter’s higher cost guidance for ’24, although higher legal costs and capital expenditures pose risks with bring along.”

Looking at AI monetization

Amid concerns about AI-related costs, executives may be eager to highlight how AI is already adding to revenue or increasing margins.

“There’s a misconception that some of these companies don’t generate revenue [AI]” said Zino. Microsoft, he noted, grew its Azure and cloud services business by 30% in the first quarter, of which about 7 percentage points came from AI services. “The problem is that it has such low levels mean it won’t have a huge impact on the wider business,” he added.

In addition to cloud growth, AI could also benefit these companies in less easily quantifiable ways, Zino says. “You’re seeing things like digital ad spending accelerate this year, and I think that’s part of the improvements you’re seeing across their platforms.”

Will the market rotation continue?

The latest earnings from the big tech sector come amid a massive market realignment. The tech stocks that pushed markets to records in the first half of the year have entered a correction as investors converted into small cap stockss on the hope that they could benefit from upcoming interest rate cuts.

For their part, Wedbush analysts aren’t too concerned about hyperscalers increasing their spend. “We believe this tech sell-off will be short-lived as the Street better digests results and commentary from the broader tech sector,” analysts wrote in a note Thursday.

Zino also suggested that while more rotation could be in store for markets, the pullback for tech stocks could be temporary, potentially offering “a very nice opportunity for long-term investors.”

Read the original article Investopedia.