Major earnings reports from big tech companies due this week could determine the direction of the market in the near term as Wall Street looks for signs that big AI investments are paying off. Disappointing results from Alphabet and Tesla prompted a fierce sell-off, raising questions about how long it will take for the AI story to come to fruition. Last Wednesday's session saw the S&P 500 and tech-heavy Nasdaq Composite Index post their biggest drop since 2022, wiping more than $750 billion in value from the “Magnificent Seven,” Morgan Stanley's sales desk said. The Round Hill Magnificent Seven ETF (MAGS) is now down 11% from its high. MAGS's Magnificent Seven ETF performance so far this year Wolf Research's Chris Senyek said the backdrop will determine the direction of a “make or break week” with the Federal Reserve holding its July interest rate decision on Wednesday. Microsoft will report earnings on Tuesday, followed by Meta Platforms on Wednesday, and Amazon and Apple after the bell on Thursday. Last week's announcements have triggered scrutiny of AI spending. For months, tech giants have been flaunting their AI plans and ambitious visions. Now, more than 18 months after the groundbreaking ChatGPT launch, Wall Street wants results. “We expect them to deliver solid earnings, we expect them to beat EPS,” said Jay Woods, chief global strategist at Freedom Capital Markets. “Now the primary focus has shifted to AI demand. They're spending to meet that demand, and they'll ultimately benefit from that spending.” The rush to compete has created a sense of fear of being left behind. “The risk of underinvesting is significantly greater than the risk of overinvesting,” Alphabet CEO Sundar Pichai said on the earnings call. But so far, most of the AI revenue growth has come within the cloud business, which trains and runs large language models, while gains elsewhere appear to be “more qualitative,” Deutsche Bank's David Volkerts Landau said. “Tech companies are racing to lead the AI race because high costs, scarcity of semiconductor resources, and the pace of progress make investment a zero-sum game,” the group's chief economist wrote in a note on Tuesday. “Only a few will emerge as champions. If they look away for even a moment, they risk falling light years behind everyone else.” As companies continue to pour large amounts of money into AI projects, Baird's Ted Mortenson expects the payoff to be delayed until 2025 or 2026. Is the selling pressure continuing? Some Wall Street analysts believe strong quarterly earnings may not be enough to reverse the decline in tech stocks. “We believe there is still room for the recent market rotation, as the Fed is overwhelmingly expected to cut interest rates by at least 25%.” [basis points] “The combination of expectations from the September meeting, a possible Trump victory on Nov. 5, and investors still over-holding large tech stocks, has driven a 5D pile on Alphabet shares over the past five days,” Woods said. If the company fails to meet expectations or post “monster forecast beats,” it could lead to continued consolidation and the stock could trade in a tight range, Woods said. Seasonal rotations could also be a factor in volatility from here, he added. At the same time, the recent sell-off could also dampen expectations for these already highly-anticipated companies, T. Rowe Price portfolio manager Dominic Rizzo said Monday on CNBC's “Closing Bell: Overtime.” “I think the bar has been lowered,” he said. “My gut feeling is that tech earnings are going to be better than people expect.”
