BIG Tech earnings arrive next week, right in time for investors looking for an artificial intelligence (AI) powered rebound in the slumping S&P 500 Index, which just suffered through its worst week in over a year.
Microsoft, Meta Platforms, Google parent Alphabet and Tesla, all of which are among the so-called Magnificent Seven group of tech giants, will report next week. Technology stocks are selling off, with the Nasdaq 100 Index registering its biggest weekly drop since November 2022 in the midst of a four-week losing streak, its longest since December 2022. Even AI darling Nvidia is getting hit, plunging 10 per cent on Friday (Apr 19) and wiping out US$212 billion in market value for its worst day since the Covid pandemic in March 2020.
But hope is on the horizon. Profits for the Mag Seven – which also includes Apple, Amazon.com and Nvidia – are forecast to rise 38 per cent in the first quarter from a year ago, dwarfing the overall S&P 500’s 2.4 per cent anticipated year-over-year earnings growth, according to Bloomberg Intelligence data.
Around 178 S&P 500 companies – representing more than 40 per cent of the index’s market capitalisation – will post results next week. But the biggest expectations are for megacap tech firms. The problem is, when excluding Nvidia, the leading chipmaker for AI technology, expected net income growth for the group falls to 23 per cent, and the AI plans to get squishier. Nvidia, which Goldman Sachs Group’s trading desk dubbed “the most important stock on planet Earth”, does not report its earnings for another month.
“Nvidia is the company that is actually putting up and surpassing estimates, but for tech as a whole, especially if there’s an AI theme, investors have become a bit more discerning when it comes to profits,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “Investors want to see that companies are actually starting to see growth from AI, or at least that they have a credible plan to grow through AI.”
Seeping scepticism
That scepticism is seeping into the prices of the world’s largest tech stocks. While they have been responsible for the bulk of this year’s equity market gains, they have shed more than US$930 billion in value since the Nasdaq 10O peaked last month, as traders raise bets that interest rates will stay higher for longer.
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Investors will read the first tea leaves on Tuesday when Tesla delivers results after the market closes. Meta will report on Wednesday, followed by Microsoft and Alphabet on Thursday. Apple and Amazon will open their books the following week. Nvidia reports on May 22.
Meta is the standout of next week’s group, with shares up about 36 per cent this year, compared with gains of around 10 per cent for Alphabet, 6 per cent for Microsoft and Tesla’s near 41 per cent collapse. The Facebook parent is expected to show revenue growth of 26 per cent this quarter and almost double the net earnings from a year ago. It has been heavily investing in AI to improve ad targeting and recommend content to its massive user base.
Microsoft is also expected to benefit from AI, which its has been implementing its Copilot AI assistant into its products, including Office and its GitHub coding platform. Last quarter, demand for AI products fuelled growth in its key Azure cloud-services business, and it’s expected to deliver more than 15 per cent growth on the top and bottom lines this time.
“There are reasons to be optimistic that because of AI, Microsoft’s growth can be higher than it would normally be,” said Michael Nell, a senior investment analyst and portfolio manager at UBS Asset Management, whose firm also owns shares of Nvidia and Amazon. “It has already been delivering higher growth.”
On the flipside is Alphabet, which is facing scepticism about its AI plans after some high-profile missteps. Plus, the integration of AI into other search engines like Bing is putting Google on the defensive. The company’s past two reports have been met with sizable sell-offs, and any disappointment could reinforce the narrative that it’s falling behind. Still, net earnings are expected to rise more than 30 per cent this quarter, with revenue up almost 14 per cent, a reflection of the durability of big tech’s growth drivers.
Trend reversing
“There’s been a recovery in cloud computing, and the start of an online ad cycle, which will benefit from the big political event later this year, as well as the ads frontrunning the Olympics – and of course, most significantly, you have AI,” said Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research and Strategy Team. “Its hard to deny that the momentum in tech continues.”
When excluding the Magnificent Seven, the rest of the S&P 500’s profits are projected to contract by 3.9 per cent. But Wall Street expects this trend to reverse as the year progresses. In the first quarter of 2025, those seven firms are expected to post earnings growth of 17.5 per cent compared with nearly 18 per cent for the rest of the S&P 500, BI data show.
However, the year-over-year metrics are being distorted by so-called base effects – the impact of comparing quarterly profits against what happened a year ago. So while Big Tech’s profit growth appears to be narrowing in the coming year, much of that is due to tough comparisons from 2023. They are still generating strong growth and generating healthy margins after aggressive cost-cutting efforts in the past year.
Big tech is crucial to the S&P 500 since the companies carry the heaviest weightings in the benchmark. After this year’s advance, valuations have gotten lofty. Even with the latest sell-off, the Magnificent Seven still trade at a combined 31 times forward earnings, according to data compiled by Bloomberg.
“The bar is pretty high,” said Matt Peron, global head of solutions at Janus Henderson Investors. “The question is, are we at the point where nothing besides a very fantastic beat will be enough to continue driving stocks higher? There could be some disappointments relative to expectations, though I don’t think the earnings story will take down the market too much, unless the outlooks are really bad.” BLOOMBERG
