Big Tech Earnings Week: Will the U.S. Stock Market Rally Continue?

A Quarter of S&P 500's Market Cap... Must Justify the Rally
Focus on AI Investment Performance

Despite the aftermath of the war with Iran, major U.S. tech companies have driven the Standard & Poor’s (S&P) 500 Index to record highs, drawing investors’ attention to this week’s earnings announcements.

According to Bloomberg News on the 26th (local time), Alphabet, the parent company of Google, Microsoft (MS), Amazon, and Meta Platforms are set to announce their earnings on the 29th. Apple will release its results on the 30th. The combined market capitalization of these five companies amounts to approximately 16 trillion dollars, accounting for a quarter of the total market capitalization of the S&P 500 Index.

Adding Nvidia and Tesla to these five companies forms the so-called Magnificent 7 (M7), which have recently been the driving force behind the rise of the U.S. stock market. In particular, the share prices of Alphabet, Amazon, Nvidia, and Meta have all risen by more than 25% since March 30. This appears to be an effort by big tech firms to dispel early-year concerns about overinvestment in artificial intelligence (AI). Keith Lerner, Chief Investment Officer and Chief Market Strategist at Truist Advisory Services, stated, “This week will be a very important one. The recent rally in stock prices needs to be justified by earnings results.”

Morgan Stanley predicted that the net profit of the M7 would grow by 25% this year, far exceeding the average net profit forecast of 11% for all S&P 500 companies. Tesla, one of the M7, announced on the 22nd that its first-quarter operating profit increased by 136%, significantly surpassing Wall Street’s expectations.

Experts analyzed that the recent war in Iran is increasing the appeal of technology stocks. Allan Bond, portfolio manager at Jensen Investment Management, commented that the economic risks from the Iran war have driven up oil prices and raised the likelihood of entrenched inflation, making the strong earnings growth of large tech firms even more attractive. He said, “Technology stocks offer an opportunity to invest in long-term growth prospects. There are not significant concerns about geopolitical turmoil, and recently, it has been possible to invest at quite attractive discounts.”

However, concerns remain over the massive costs of AI investment. According to data compiled by Bloomberg, the combined capital expenditures of MS, Alphabet, Amazon, and Meta are projected to rise sharply from 411 billion dollars last year to 649 billion dollars this year. Currently, these massive investments by big tech are putting pressure on cash flow. For example, Amazon’s free cash flow in the first quarter of this year was observed at minus 13.3 billion dollars. This marks the largest cash outflow since 2022, when the company invested heavily in warehouse construction to respond to surging demand during the COVID-19 pandemic. During the same period, Meta’s cash flow is also expected to reach just 4 billion dollars, the lowest in four years. On the 23rd, Meta announced it would cut about 10% of its total workforce. This earnings season may provide hints as to how big tech plans to reassess their massive AI investment strategies.

Meanwhile, Bloomberg reported that investors will be closely watching the big tech companies’ cloud computing businesses during this earnings season. Demand from AI startup services such as Anthropic and OpenAI is driving revenue growth and already exceeding supply capacity. The outlet projected that Amazon Web Services (AWS) would see a 26% increase in first-quarter cloud computing revenue, while Microsoft Azure and Google Cloud revenues are expected to rise by 38% and 50%, respectively.

This content was produced with the assistance of AI translation services.