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

Despite the aftermath of the war with Iran, U.S. big tech companies have driven the S&P 500 Index to new record highs, drawing investor attention to this week's earnings announcements.

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

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The so-called Magnificent Seven (M7)-the five companies above plus Nvidia and Tesla-have been the main drivers of the recent U.S. stock market rally. In particular, Alphabet, Amazon, Nvidia, and Meta shares have all risen by more than 25% since March 30. This surge appears to be an effort by big tech firms to dispel early-year concerns over excessive investment 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," adding, "Strong earnings results are needed to justify the recent rally in share prices."

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

Experts have analyzed that the recent war in Iran is boosting the appeal of tech stocks. Allan Bond, Portfolio Manager at Jensen Investment Management, explained that economic risks caused by the Iran conflict are pushing up oil prices and raising the likelihood of entrenched inflation, making the robust profit growth of large tech companies even more attractive. He said, "Tech stocks offer an opportunity to invest in long-term growth prospects. There are few concerns about geopolitical turmoil, and recently, it has been possible to invest at quite attractive discounted prices."

However, concerns remain over the massive costs of AI investment. Data compiled by Bloomberg shows that the total capital expenditures of Microsoft, Alphabet, Amazon, and Meta are expected to surge from $411 billion last year to $649 billion this year. Currently, the massive investments by big tech firms are putting pressure on their cash flows. For example, Amazon's free cash flow in the first quarter of this year was observed to be -$13.3 billion. This represents the largest cash outflow since the company invested heavily in warehouse construction to meet the surge in demand during the COVID-19 pandemic in 2022. During the same period, Meta's cash flow is also projected to drop to $4 billion, the lowest in four years. On April 23, Meta announced plans to cut about 10% of its total workforce. This round of earnings releases may provide hints on how these companies are reassessing their massive AI investment plans.

Meanwhile, Bloomberg expects investors to focus on big tech's cloud computing businesses during this earnings season. Demand for services from AI startups such as Anthropic and OpenAI is driving sales growth and already exceeding supply capacity. The outlet projected that Amazon Web Services (AWS) would see first-quarter cloud computing revenue rise by 26%, while Microsoft Azure and Google Cloud revenues are expected to grow by 38% and 50%, respectively.

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