Earnings Season to Show if Big Tech Stocks Can Justify AI Hype

16 Jul

Upper echelon of tech realm is expected to report the most profits since early 2022 as the bar is set high thanks to the big promise of artificial intelligence.

Earnings season is about to hit fever pitch with the biggest names in the corporate world getting ready to deliver spring-quarter financial updates. The bar is set high thanks to the promise of artificial intelligence to rewire how businesses operate, spend and make money.

How high exactly? All S&P 500 companies collectively are predicted to knock out the biggest increase in profits in more than two years — year-on-year earnings growth is pinned at 8.8% for the quarter ended June, the highest since the first quarter of 2022.

Froth or Not?

Stakes are high. The upcoming string of earnings data will show whether big tech high-flyers can justify the AI hype that has propelled stocks to record after record. The S&P 500 has notched more than 36 all-time closing highs this year and is sitting on gains of more than 18% since it started trading in January.

The Big Dogs

Apparently, optimism is sweeping left and right, lifting valuations of companies big and small. A handful of them have been singled out as the biggest group of winners. And — you guessed it — they’re all involved in the AI narrative.

Chipmaking giant Nvidia (ticker: NVDA) and a clique of big tech heavyweights are lined up to show if their earnings and revenue guidance will catch up to the sky-high valuations. Nvidia has more than doubled this year, soaring above $3 trillion in market value. Briefly, it became the world’s largest company. Its peers Microsoft (ticker: MSFT), Facebook parent Meta (ticker: META), Apple (ticker: AAPL) and Alphabet (ticker: GOOGL) have rocketed to records this year as well.

Heavy Concentration

The 10 biggest companies in the S&P 500 fill up about 37% of its worth, which presently gravitates toward $48 trillion. This said, these 10 titans of capitalism contribute 24% to the broad-based index’s earnings — the highest ratio since 1990.

To keep going with the numbers, before we dive into what’s coming over the next few weeks, the S&P 500 companies are trading at 21.4 times their projected earnings over the next 12 months. For comparison, the average multiple for a five-year stretch is 19.7.

It gets even more interesting when you zoom in and double click on five tech titans — Nvidia, Apple, Microsoft, Meta and Amazon. Their price/earnings multiples have ballooned to an average of 34 times projections, up from 28 times. The AI bellwether, Nvidia, has soared to 41 times, from 24 times in January.

Against that backdrop, analysts are quick to point out that a correction in stock prices may loom large if these corporate giants can’t beat out their earnings projections. Is there room for disappointment?

Stacked Up Against Expectations

Let’s go around the table and see what’s coming over the next few weeks. We’ll keep it tight so we’ll only look into the elite Magnificent Seven club.

July 23

Microsoft (ticker: MSFT)

Year-to-date performance: 23%

Revenue guidance: $64 billion

Alphabet (ticker: GOOGL)

Year-to-date performance: 33%

Revenue expectations: $79 billion

Tesla (ticker: TSLA)

Year-to-date performance: 0% (find out the reasons).

Revenue expectations: $20.16 billion

July 31

Meta (ticker: META)

Year-to-date performance: 44%

Revenue guidance: $36.5 billion to $39 billion

August 1

Apple (ticker: AAPL)

Year-to-date performance: 24%

Revenue expectations: $84 billion

Amazon (ticker: AMZN) (date unconfirmed)

Year-to-date performance: 30%

Revenue guidance: $144 billion to $149 billion

August 21

Nvidia (ticker: NVDA) (date unconfirmed)

Year-to-date performance: 168%

Revenue guidance: $28 billion

Let's Hear from You!

Are we going to see another blockbuster quarter of record revenue and profits? Or is the AI hype overblown and could this mean big tech may let us down? Share your thoughts below!