A Big Problem for Big Tech is Overly Optimistic Earnings Estimates

The last time Big Tech reported earnings, Donald Trump had just assumed office, the stock market was on a tear thanks to hopes for a business-friendly government, and investors’ biggest concern was how quickly companies could turn investments in artificial intelligence into profits.
Now, just three months later, the landscape looks much gloomier.

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This week, Microsoft Corp., Apple Inc., Meta Platforms Inc., and Amazon.com Inc. are set to report their quarterly results against a backdrop of market anxiety. The focus has shifted dramatically, from excitement over AI to mounting fears over a full-blown trade war that has erased $5.5 trillion from the S&P 500 Index.

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Concerns about tariffs sparking a potential recession have overtaken earlier optimism, and investors are now favoring safe-haven assets like gold instead of bargain-hunting for discounted stocks.

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Despite the uncertain climate, Wall Street analysts have largely kept their earnings forecasts intact. For the "Magnificent Seven" — which also includes Alphabet Inc., Tesla Inc., and Nvidia Corp. — analysts are still projecting an average of 15% profit growth for 2025, a figure that has barely moved since early March even as trade tensions have escalated.

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This situation sets the stage for a critical week ahead. With the four tech giants accounting for nearly 20% of the S&P 500’s weight, the stakes are high. Any earnings miss could spark sharp selloffs in a market already rattled by fear, even though the recent share price declines have brought valuations down to more reasonable levels.
Additionally, disappointing outlooks from these industry leaders could stoke even more concern about a slowdown in corporate spending, compounding market worries.

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"Any slight miss will likely trigger further selling because of the nervousness around tariffs," said Phil Blancato, chief market strategist at Osaic Wealth.
However, Blancato sees the dip in Big Tech stocks as a buying opportunity for longer-term investors.

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Some early clues emerged last week. Tesla reported one of its worst quarters in years, but investors found some comfort in signs that CEO Elon Musk plans to refocus on Tesla rather than politics.

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Meanwhile, Alphabet beat earnings expectations, though it offered little guidance for the future.
The Bloomberg Magnificent Seven Index rose 9.1% last week as markets rebounded, yet the index remains down about 15% in 2025.

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A deeper examination of Big Tech’s performance will come over a crucial two-day stretch starting Wednesday when Meta and Microsoft report.
Even though many executives have avoided publicly estimating the impact of tariffs, analysts have done their own calculations.
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Bloomberg Economics models suggest that if the average tariff rate rises to 22%, it could shrink S&P 500 net income by about 7% in 2025, compared to current expectations for nearly 12% growth, according to Bloomberg Intelligence chief equity strategist Gina Martin Adams.

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Another major focus will be corporate spending plans. Microsoft, Alphabet, Amazon, and Meta are collectively expected to invest roughly $300 billion in capital expenditures during their current fiscal years.

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While companies had previously pledged to sustain their investment pace, Microsoft’s decision to delay work on some data centers hints that tech giants might now be rethinking those commitments, especially as cloud computing costs climb.

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Apple faces its own unique risks. With a heavy reliance on Chinese manufacturing, it is highly exposed to tariffs. Some analysts believe there could be a temporary sales boost as consumers rush to buy products before prices rise.
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However, any gain would likely be short-lived, with tariffs eventually sapping demand.

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Amazon, meanwhile, could feel the pinch in its e-commerce and advertising businesses, though its high-margin web services division could help cushion the blow, according to Jefferies analyst Brent Thill.Given the significant macroeconomic uncertainty, many investors aren’t expecting precise forecasts from executives.
Companies like American Airlines Group Inc. and Skechers USA Inc. have already abandoned providing guidance altogether this quarter.

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Michael Shaoul, founder of the ION Macro Fund, noted that experienced management teams may choose not to even attempt to offer future projections under these conditions.
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“I think the more seasoned leaders simply won’t try,” he said. Despite all the challenges, there’s a bullish argument for Big Tech.
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The industry’s dominant market positions and strong balance sheets could make them better equipped to weather an economic slowdown compared to other sectors.
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Additionally, valuations have come down significantly after recent declines.
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For instance, Alphabet now trades at 17 times its expected profits over the next 12 months, compared to a decade-long average of 21 times, according to Bloomberg data.

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This valuation reset could attract bargain hunters, particularly if signs emerge that trade tensions might ease. Last week, markets surged after Trump indicated a potential trade deal with China could lower tariffs.

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Still, Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services, remains cautious.
“The valuations are getting more attractive,” he said. “But we’re holding back for now because there are still too many unanswered questions about earnings.”

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