This week represents a potential inflection point for the US stock market, as the earnings reports from major technology companies are poised to define the market's direction for the remainder of the year. All eyes are on five key players – Microsoft (MSFT), Alphabet (GOOGL), Meta (META), Amazon (AMZN), and Apple (AAPL) – which collectively account for approximately a quarter of the S&P 500 index.
Beyond assessing their operational performance across various sectors, from cloud computing and e-commerce to electronic devices and digital advertising, investors will be particularly focused on their outlook for artificial intelligence developments. Massive spending on AI has fueled a robust market rally over the past three years, but growing concerns about when these companies will begin to reap the rewards of these investments could temper market enthusiasm.
Talley Leger, chief market strategist at Wealth Consulting Group, which manages $5 billion in assets, stated that this week “could determine whether this rally continues or pauses.”
So far, the US earnings season has been strong. Approximately 85% of the companies in the S&P 500 have exceeded Wall Street's expectations, which is the best performance in four years. This performance has helped to alleviate concerns about escalating trade tensions and credit risks in the banking system.
The so-called “Magnificent Seven” technology companies have contributed nearly half of the S&P 500's 15% gain this year. However, to maintain this momentum, investors are seeking assurances from these companies that the massive investments in computing infrastructure will continue and ultimately pay off in the future.
Microsoft, Alphabet, Amazon, and Meta are projected to have a combined capital expenditure of $360 billion this fiscal year, with much of it related to artificial intelligence. According to analyst forecasts, this spending is expected to jump to nearly $420 billion next year.
The tech giants' spending on AI has boosted stock prices in numerous industries, from semiconductor manufacturers and networking companies to utilities. Nvidia (NVDA), the world's most valuable company, is among the biggest beneficiaries of this spending wave and is scheduled to report earnings on November 19.
So far, revenue growth related to AI services has been most evident in the cloud computing businesses of Amazon, Microsoft, and Alphabet, making these divisions a focal point of the earnings reports. Meta has also stated that its AI investments are improving ad targeting and user engagement in its social media division.
However, these expenses far exceed the revenue these companies are generating from AI. But investors are choosing to trust them, betting that these expenditures will enable them to dominate as the technology proliferates and new AI applications emerge, thereby driving up large-cap tech stocks this year.
David Lefkowitz, head of US equities at UBS Global Wealth Management, which manages over $4.5 trillion in assets, stated: “As long as we don’t see any indication that there’s a crack in the AI capital spending story or its commercialization prospects, I think that’s enough to support the bull market.”
Despite this, the massive capital expenditure is threatening to erode one of the group’s most prized attributes: exceptional earnings growth.
According to data compiled by Bloomberg Intelligence, third-quarter profit growth for the “Magnificent Seven” is expected to be 14%, down from 27% in the second quarter. That's almost twice the 8% profit growth expected for the broader S&P 500, but it would also be the group's slowest pace since the first quarter of 2023.
However, large technology companies have a history of reporting earnings that exceed Wall Street's expectations. This is precisely what many investors are hoping for, because in Leger's view at Wealth Consulting, consistently outperforming has been the stock market's “biggest source of strength.”
Leger says: “It suggests that there’s a lot of room for expectations to improve, which bodes well for this earnings season.”
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