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Magnificent Seven earnings arrive with stocks at critical moment

Bloomberg
Bloomberg • 6 min read
Magnificent Seven earnings arrive with stocks at critical moment
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Big Tech earnings arrive next week, right in time for investors looking for an artificial intelligence-powered rebound in the slumping S&P 500 Index, which just suffered through its worst week in over a year.

Microsoft Corp, Meta Platforms Inc, Google parent Alphabet Inc and Tesla Inc, 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 Corp is getting hit, plunging 10% on Friday 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 Inc, Amazon.com Inc and Nvidia — are forecast to rise 38% in the first quarter from a year ago, dwarfing the overall S&P 500’s 2.4% anticipated year-over-year earnings growth, according to Bloomberg Intelligence data. 

Around 178 S&P 500 companies — representing more than 40% of the index’s market capitalization — 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%, and the AI plans get squishier. Nvidia, which Goldman Sachs Group Inc’s trading desk dubbed “the most important stock on planet Earth,” doesn’t report its earnings for another month.

Profit Growth for Seven Biggest Firms Narrows Without Nvidia |

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“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 Skepticism
That skepticism is seeping into the prices of the world’s largest tech stocks. While they’ve been responsible for the bulk of this year’s equity market gains, they’ve 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. 

Investors will read the first tea leaves Tuesday, when Tesla delivers results after the market closes. Meta will report on Wednesday, followed by Microsoft and Alphabet Thursday. Apple and Amazon will open their books the following week. Nvidia reports on May 22.

See also: Nvidia is missing link in a strong season of AI earnings reports

Meta is the standout of next week’s group, with shares up about 36% this year, compared with gains of around 10% for Alphabet, 6% for Microsoft and Tesla’s near 41% collapse. The Facebook parent is expected to show revenue growth of 26% 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 fueled growth in its key Azure cloud-services business, and it’s expected to deliver more than 15% 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 skepticism 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 selloffs, and any disappointment could reinforce the narrative that it’s falling behind. Still, net earnings are expected to rise more than 30% this quarter, with revenue up almost 14%, 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%. 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% compared with nearly 18% for the rest of the S&P 500, BI data show. 

For more stories about where money flows, click here for Capital Section

Profit Lead for Seven Largest US Stocks Set to Shrink in 2024 | The gap in earnings growth for those shares versus the rest is forecast to narrow

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’re 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 selloff, 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.”

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