How This Week’s Big Tech Earnings Could Affect the Broader Market

Main Takeaways

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

• Big moves in its shares could weigh on major indexes, and markets may be nervous after earnings reports from Tesla and Alphabet last week sent tech stocks tumbling.

• Any weakness in Big Tech earnings this week would widen the cracks that began to appear last week.

• Investors will also be closely watching capital expenditures from Microsoft and Amazon after Wall Street expressed displeasure with Alphabet’s spending on artificial intelligence.

The stock market has been turned upside down in recent weeks, and the ride could get even crazier this week with the majority of seven greats The earnings announcement comes at a critical juncture for the group.

Bank of America estimates that more than a third of the S&P 500’s total earnings will be reported this week. This is largely due to Microsoft (Microsoft) He will submit his report on Tuesday afternoon, Meta (MetaThe results come out when the markets close on Wednesday, and apple (Apple company) And Amazon (AmazonBoth companies are scheduled to report after the close of trading on Thursday. The four companies represent nearly 20% of the S&P 500 — roughly the same as the health care and industrial sectors combined.

Big moves in their stocks would take major indexes into account, and markets could be nervous ahead of this week’s reports after Tesla Inc.Tesla) and the alphabet (Google) Profits Tech stocks sent into a tailspin Last week, the sector corrected and pushed the S&P 500 to its worst day since December 2022.

Any weakness in Big Tech earnings this week could widen the cracks that began to appear last week. It could also feed into or challenge the narrative that is gathering around Spending on artificial intelligence Which has affected morale lately.

Concerns over AI spending in the spotlight

The seven largest companies are expected to report earnings growth of 30% compared with the second quarter of last year, when earnings totaled more than $81 billion, according to Bank of America. That’s a slowdown from the previous quarter, but still far outpaces the 6% growth in earnings for the rest of the S&P 500.

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

Alphabet reported Profits increased by 28%. In the second quarter, it beat analysts’ estimates. However, the stock fell as investors focused on Capital expenditureswhich 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 Defend company spendingHe said the risks Google faces from underinvesting in AI are greater than the risks of overinvesting.

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“Capex rates are certainly high,” said Angelo Zeno, an analyst at CFRA. “But the way we look at it, we shouldn’t look at high capex as a disappointment. We think that’s healthier spending than increasing capex.” Operating expenses“That’s not necessarily what these companies do.”

However, spending has become a heavy burden for the tech giants. “With job openings declining in the second quarter, we do not expect a repeat of last quarter’s higher spending guidance, although higher legal and capital spending pose risks,” Bank of America analysts said in a forthcoming Meta report.

AI Monetization Monitoring

Amid concerns about the costs associated with AI, executives may be keen to emphasize how AI actually adds to revenue or expands margins.

“There’s a misconception that some of these companies aren’t investing in AI,” Zeno said. He noted that Microsoft’s Azure and cloud business grew 30% in the first quarter, with about 7 percentage points of that coming from AI services. “The problem is that this growth is coming from such a low level that it doesn’t have a significant impact on the broader business,” he added.

Beyond cloud computing growth, these companies may benefit from AI in ways that are harder to measure, Zeno said. “You’re seeing things like digital ad spending accelerate this year, and I think part of that is because of the improvements you’re seeing on their platforms.”

Will the market continue to turn?

The latest earnings from big tech companies come amid a massive market reversal. Tech stocks that drove markets to record highs in the first half of the year have fallen into a correction as investors grow increasingly anxious. Converted to small cap stocksHoping they can take advantage of impending interest rate cuts.

For their part, Wedbush analysts aren’t too concerned about the tech giants’ spending spree. “We believe this tech selloff will be short-lived as the market better digests the results and commentary from the broader tech sector,” the analysts wrote in a note Thursday.

Zeno also suggested that while more rotation may still be ahead for the markets, the pullback in tech stocks could be temporary, which could represent a “very nice opportunity for long-term investors.”

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