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

Key Takeaways

This week will be a bumper week with scores of companies set to report results, including Microsoft, Apple, Amazon and Meta in arguably the busiest week of an already busy earnings season.

Moves in big stocks would ripple across the major indexes, and markets could remain jumpy after recent reports from Tesla and Alphabet last week sent tech stocks spiralling.

Any cracks in the edifice will be widened this week as all the big tech companies report their earnings. The cracks began last week.

Meanwhile, investors will be scrutinising spending on capital expenditures at Microsoft and Amazon in the wake of Wall Street’s grumbling over Alphabet’s AI spending.

As stock markets have been turned upside down in the past few weeks, the wild ride could go a few notches more this week as the majority of the Magnificent Seven post earnings, at a crucial juncture for the group.

According to Bank of America, more than one-third of aggregate S&P 500 earnings will come this week, and much of it is due to the fact that Microsoft (MSFT) will report Tuesday after the bell, Meta’s (META) results come after markets close Wednesday, and Apple (AAPL) and Amazon (AMZN) will both report after hours Thursday. The four firms account for almost 20 per cent of the S&P 500 index, almost as much as the Health Care and Industrial sectors combined.

Big plays in their stocks would pull giant indexes behind them and markets could be jittery heading into this week’s numbers after last week’s tech earnings wiped away all the gains from a Peloton (PTON) budgetary pop, sending tech stocks tumbling into correction mode and dragging the S&P 500 into its worst day since December 2022.

Any flaw in this week’s Big Tech earnings could open up cracks that finally appeared last week, and tie into, or fight, the narrative that’s crystallising about spending on AI that’s weighed on sentiment of late.

AI Spending Concerns in the Spotlight

The Magnificent Seven are forecast to report earnings rose 30 per cent from the second quarter a year ago, when profits topped $81 billion. That would be a slowdown from the prior quarter’s pace, but would still handily outpace the S&P 500’s projected profit growth of 6 per cent.

Two of the companies due to report this week – Meta and Amazon – are two of just four, along with Google’s parent Alphabet, that are expected to account for more than half of aggregate S 500 earnings growth. But last week, when Alphabet reported hours after Netflix shocked the market with a ‘miss’, it showed what, if any, cover profit growth gives markets during a wider selloff.

In the second quarter, Alphabet announced that earnings soared 28 per cent, beating analyst expectations. But the stock still plunged, with investors focusing on the company’s capital expenditure that had almost doubled compared with last year, with tech giants splurging on new AI infrastructure to keep up with cloud computing competitors such as Microsoft and Amazon. Alphabet’s chief executive Sundar Pichai responded that the biggest threat to Google was ‘underinvesting in AI’ compared with ‘overinvestment’.

The CapEx rates are up,’ said Angelo Zino of CFRA… But higher CapEx is typically not a negative – we think it’s healthy dollars out there than ramping up OpEx, which is not what they’re necessarily doing.

Still, spending has become an albatross for the tech giants. ‘With 2Q job openings down,’ wrote analysts at Bank of America about Meta’s upcoming report, ‘we do not expect a rerun of last quarter’s higher ‘24 expense guide, although higher legal CEO and capex are risks.’

Watching AI Monetization

As executives worry about AI costs, they’ll be eager to talk up how it’s adding revenue or increasing margins.

‘There’s sort of a misunderstanding out there that some of these companies are not monetising [AI],’ said Zino. Microsoft grew its Azure and cloud services business by 30 per cent in the first quarter, about 7 percentage points of which was from AI services, he said. ‘The problem is it’s coming off such low levels that it’s not a huge impact on the wider business.

Besides any boost from cloud growth, AI might be helping these firms in less measurable ways, Zino notes. ‘You’re seeing digital ad spend accelerating this year and my belief is part of that is because of the improvements that you’re seeing on their platforms.

Will the Market Rotation Continue?

Those results come amid a massive realignment in the stock market. The tech names that powered markets to record highs early this year are now in a selloff after the rotation to small-cap stocks on hopes they would profit from imminent central bank interest-rate cuts.

Meanwhile, Wedbush’s analysts are not too rushed about hyperscalers upping their investment. ‘We believe this tech sell-off will be short lived as the Street better digests results and commentary from the broader tech sector,’ wrote analysts in a note Thursday.

Zino piled on, noting that while the sell-off opened the door for even more of a rotation for markets, a pullback for the tech space could be short-lived and ‘a very nice opportunity for long-term investors’.