Bank of America estimates that more than a third of the S&P 500’s aggregate earnings will be reported this week. This is largely due to the fact that Microsoft (MSFT) will report on Tuesday afternoon the results of Goal (META) will be published when the markets close on Wednesday, and Manzana (AAPL) and Amazon (AMZN) are scheduled to report after the market close on Thursday. These four companies account for nearly 20% of the S&P 500 index, roughly as much as the Healthcare and Industrials sectors combined.
Significant moves in their shares would affect the main indexes, and markets could be on edge ahead of this week’s reports, after the results of Tesla (TSLA) and Alphabet (GOOGL) sent tech stocks lower last week, dragging the sector into a correction and leading the S&P 500 to record its worst day since December 2022.
Any weakness in big tech earnings this week could exacerbate the cracks that began to appear last week. They could also fuel or challenge the narrative around artificial intelligence (AI) spending that has weighed on sentiment lately.
Concerns over AI spending in focus
The Magnificent Seven is expected to report earnings growth of 30% from 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 far outpace the rest of the S&P 500’s earnings growth of 6%.
Two of the companies reporting this week, Goal and Amazonare expected to be some of the largest contributors to aggregate S&P 500 earnings growth. However, Alphabet’s results last week showed that robust earnings growth may not be enough for Wall Street.
Alphabet Google Inc. reported a 28% rise in second-quarter profit, beating analysts’ estimates. However, shares fell as investors focused on capital expenditures, which nearly doubled from last year, as Google invests heavily in AI infrastructure to keep up with rivals in cloud computing. Microsoft and AmazonAlphabet CEO Sundar Pichai defended the company’s spending, saying the risk to Google of not investing in AI was greater than the risk of overinvesting.
Still, spending has become a concern for the tech giants. “With job openings declining in the second quarter,” Bank of America analysts said of Meta’s upcoming report, “we do not anticipate a repeat of the higher Q24 expense guidance, although higher legal and CapEx expenses are risks.”
Looking at AI monetization
Amid concerns about AI-related costs, executives may be interested in highlighting how AI is already contributing to revenue or expanding margins.
“There’s kind of a misperception that some of these companies aren’t monetizing [la IA]”Zino said. Microsofthe noted, grew its Azure and cloud services business by 30% in the first quarter, about 7% of which came from AI services. “The problem is that it comes from such low levels that it doesn’t have a big impact on the overall business,” he added.
Beyond cloud growth, AI could be benefiting these companies in less easily quantifiable ways, Zino said. “You’re seeing things like digital ad spending accelerating this year, and my belief is that part of that is due to the improvements you’re seeing in their platforms.”
Will the market rotation continue?
The latest results from big tech companies come amid a massive market reorientation. Tech stocks that drove markets to highs in the first half of the year have fallen into a correction as investors rotated into small-cap stocks in hopes that they could benefit from imminent interest rate cuts.
Wedbush analysts, meanwhile, aren’t too worried about the surge in spending from hyperscale companies. “We think this tech selloff will be short-lived as the Street better digests the broader tech sector’s results and commentary,” the analysts wrote in a note Thursday.
Zino also suggested that while there could be further rotation in the markets, the correction in tech stocks could prove temporary, which could present “a very good opportunity for long-term investors.”
Source: Ambito
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