Tech Titans Tackle Earnings as AI Innovations and Valuations Stir Market Buzz
1min read As U.S. earnings season reaches its peak, five of the Mag 7 tech giants—Google, Meta, Microsoft, Amazon, and Apple—are set to release their latest financial reports. Analysts on Wall Street forecast that the third-quarter profit growth for Mag 7 will exceed 18% year-over-year, albeit a notable slowdown from the previous quarter’s 37% surge. Nevertheless, these firms are anticipated to outperform the S&P 500’s projected overall earnings growth of 3-4%.
Despite potential headwinds such as rate cut prospects, stringent regulations, and substantial capital expenditures, the earnings potential, AI-driven growth, and robust capital returns make the long-term outlook for large-cap tech stocks favorable. Notably, Alphabet's revenue is expected to achieve double-digit percentage growth, while Apple, Meta, and Amazon might see single-digit increments.
However, skepticism arises as investors weigh the true growth potential of AI amidst a shift of funds toward sectors like real estate, utilities, and financials—a trend driven partly by the expectation of interest rate cuts. Since July, the cumulative return for Mag 7 has been overshadowed by other sectors, posting a modest 2% decline against double-digit gains in utilities, real estate, financials, and industrials.
Valuations remain historically high, with Apple and Microsoft trading at forward price-to-earnings ratios of 32x and 33x, respectively, surpassing their 10-year averages of 20x and 25x. Despite these concerns, approximately 90% of analysts suggest buying stocks of Microsoft, Alphabet, and Nvidia, highlighting enduring confidence in their market positions and growth trajectories.
Ross Mayfield and Mark Malek express cautious optimism about tech stocks. They acknowledge potential overvaluation yet emphasize significant growth prospects and profit potential compared to other industries. Malek notes the difficulty in finding comparable growth elsewhere, despite some prominent investors voicing caution.
The focus on AI developments remains critical. Specifically, Google’s progress with AI assistant Gemini and how it integrates with advertising, YouTube, and cloud services is keenly observed. Meta's Llama model updates and advertising revenue shifts on Instagram, Microsoft’s cloud services, and Copilot AI assistant trends are also under scrutiny.
Apple faces questions about whether AI-enhanced iPhones can spur a new wave of upgrades, with investors watching for improvements in the company’s core retail business. Meanwhile, AI-centric capital expenditures are a key focal point, with major players estimated to spend around $56 billion, marking a 52% increase from the previous year.
