Wall Street faces its sternest test of the year this week as four of the market's biggest stocks, all of which operate in its most important sector, prepare to publish quarterly earnings over the coming days.
Disappointing updates from Magnificent 7 peers Tesla (TSLA) and Alphabet (GOOGL) last week triggered the market's biggest single-day decline in more than two years. The carmaker reported the weakest profit margins in five years, and the Google parent cautioned that capital spending would likely test the $50 billion mark this year, crimping profit.
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The outsized reaction to Alphabet's modest slide in reported YouTube revenues and increased spending, as well as the selloff in Tesla shares tied to data that was largely known to investors, suggests mega-cap stocks are 'priced to perfection' and susceptible to big near-term moves if their earnings fall short of Wall Street forecasts this week.
"With the S&P 500 coming off back-to-back down weeks for the first time since April, traders are facing a key week of earnings and economic data," said Chris Larkin, managing director for trading and investing at E*Trade from Morgan Stanley.
"With the majority of megacap tech stocks about to release their numbers, the results could determine whether the Nasdaq 100 falls into correction territory after coming close to one last week," he added.
Microsoft (MSFT) will kick off a three-day stretch of Mag 7 earnings on Tuesday. The event will include June quarter updates from Apple (AAPL) , Meta Platform (META) , and Amazon (AMZN) .
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Collectively, the four mega-cap tech stocks comprise around 15% of the S&P 500's current market value, and their earnings and outlooks will be crucial to stabilizing investor sentiment over the coming months.
AI ambitions in focus
For Microsoft and Meta, the pace of AI investment spending will be crucial to assessing margin and growth prospects, and thus, investors will carefully parse details on capex plans from both companies.
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For Amazon, the pace of growth in its AWS cloud division, which is expected to see an ongoing boost from customer AI investments, will be in sharp focus.
Apple, meanwhile, will likely need to offset expected weakness in its iPhone and China sales with detailed plans for its Apple Intelligence rollout later this year following reports from Bloomberg that it won't come prior to its September launch of the iPhone 16.
"It all comes down to a key week of tech earnings season ahead with Big Tech set to show that accelerated AI driven capex, strong enterprise/consumer tech spending trends, and ultimately prove to investors that the path to AI monetization is on its way to Street numbers going higher for 2024 and 2025," said Wedbush analyst Dan Ives.
"The Street this week will be looking for clues around the pace of the AI Revolution (in order to) gauge the pace of spending and better understand the trajectory of this AI tidal wave hitting the tech sector over the coming years," he added.
However, as the weight of the Mag 7 stocks on the S&P 500 continues to increase, this assessment will heavily influence future market performance.
Mag 7 is technically challenged
In fact, LPL Financial's chief technical strategist, Adam Turnquist, notes that for the S&P 500 to break even, Mag7 pullbacks need to be matched by a collective of 212 stocks across sectors, including financials, healthcare, and industrials.
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However, he also argues that while stocks were historically 'stretched' in terms of their relative value last week, reaching the higher premium to their 200-day moving average in more than a decade, there could be more upside over the back half of the year.
"While mega caps captured most of the blame for the recent selling pressure, historically overbought conditions were also a key factor behind the pullback," he said.
"The good news is that there is still a lot of support in play before the S&P 500’s longer-term uptrend is challenged," Turnquist added.
That view seems to be supported by fund movements, as well. Bank of America's closely tracked 'Flow Show' report shows net inflows to U.S. stocks over the past month, including another $2 billion into tech stocks last week despite the Mag 7 selloff.
Broader market support
The broader backdrop for U.S. stocks also looks supportive, with GDP growth rates continuing to top forecasts and inflation pressures easing, albeit slowly, to the point where the odds of an autumn rate cut from the Federal Reserve are now pegged at 100%.
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"Investors are interested in taking more risk as the so-called soft landing looks more likely," said Jeffery Roach, chief economist for LPL Financial in Charlotte.
"We have an economy with low unemployment with rising wages, decelerating inflation, and a Fed on the cusp of cutting rates," he added. "What more could you ask for?"
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Louis Navellier of Navellier Calculated Investing, however, notes that elevated market volatility, which he sees as "clearly driven primarily by the weight of mega cap tech stocks," puts an even greater onus on the remaining Mag 7 stocks to deliver this week.
"After the disappointment in Alphabet, we probably have to hear the earnings reports of the rest of the mega tech names before a sustained recovery is likely," Navellier said.
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