The Big Tech Sector Loses Some Shine Ahead of a Big Earnings Week. But ‘Where Else Will You Find Such Growth Potential? ’

This summer, some of the major tech giants, often referred to as the Magnificent 7, faced challenges as the Federal Reserve reduced interest rates and the costs associated with implementing artificial intelligence (AI) came into sharper focus. As these leading tech companies prepare to release their quarterly earnings reports, analysts are anticipating growth, although it might not be as spectacular as in previous years. However, they still expect these companies to perform better than most in the market.

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The week is particularly significant for earnings, with Alphabet, Microsoft, Meta Platforms, Apple, and Amazon all scheduled to report. Together, these tech giants represent trillions of dollars in market value. Analysts are watching closely, expecting solid operational performance, increased AI-driven revenue, and robust advertising numbers, indicating that these companies continue to innovate and maintain market health.

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Ido Caspi, an analyst at Global X, highlighted in a recent commentary that there is evidence of generative AI gaining momentum. He noted that companies are shifting from experimenting with AI to finding ways to monetize it on a larger scale, contributing to revenue growth.

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Despite this optimism, there are indications that the Magnificent 7 may not be as essential for driving market gains as they once were. Recently, retail investors have begun shifting their focus away from big tech and toward other sectors like real estate, utilities, and financials. This rotation is partly driven by expectations that the Federal Reserve’s interest rate cuts will ease pressure on companies outside of the tech industry. Moreover, concerns about a potential “AI bubble” and the technology’s impact on the U.S. energy grid have caused some investors to question the long-term viability of AI. Additionally, some critics argue that current AI products may not be as transformative as anticipated, with many systems generating inaccurate or misleading content.

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Mark Malek, chief investment officer at Siebert Financial Services, remains more optimistic. In a recent interview, he acknowledged that some high-profile investors have scaled back their investments in big tech, but he believes there are still gains to be made. Malek pointed out that even if the numbers are not as impressive as before, these tech companies still offer more growth potential than most other sectors.

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Analysts continue to expect double-digit earnings growth for companies like Alphabet, Meta, and Amazon. Microsoft and Apple are projected to see smaller, single-digit growth, but even those modest gains are better than the 3.6% increase forecasted for the broader S&P 500. In addition to AI developments, analysts will be focusing on other key aspects of each company’s business. For example, Alphabet’s Gemini AI assistant and its potential revenue streams, along with trends in advertising, YouTube, and cloud services, will be closely watched. Similarly, Meta Platforms' Llama AI models and advertising revenue from Instagram will be scrutinized. Microsoft’s cloud services and its AI tool, Copilot, are also expected to play a significant role in the company’s results.

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Apple and Amazon, both of which report later in the week, will also provide insights into consumer behavior. Apple faces questions about the iPhone 16, with some analysts pointing to a slow upgrade cycle. Meanwhile, Amazon continues to invest in ventures like live sports streaming and satellites, but analysts are keen to see if the company’s core retail business can rebound after a period of sluggish growth and cautious consumer spending.

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This week is packed with earnings reports from other major companies as well. In total, 169 S&P 500 companies, including 10 members of the Dow 30, are set to release their quarterly results. Notable reports include those from gaming companies like Electronic Arts and Snap Inc., streaming platforms like Roku, and gig-economy companies such as DoorDash and Uber. Financial giants Visa and Mastercard, as well as pharmaceutical companies Pfizer and Eli Lilly, will also publish their earnings this week.

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In the financial sector, trading platforms like Coinbase and Robinhood are set to report after seeing an increase in cryptocurrency trading. Meanwhile, Frontier Group Holdings is expected to release earnings following speculation that it may attempt to acquire Spirit Airlines once again.

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Among the key earnings reports, fast-food giants McDonald’s and Starbucks will likely draw attention. McDonald’s has been dealing with the fallout from an E. Coli outbreak and increased competition in the value-meal space, while Starbucks, under new leadership, is trying to streamline its menu and reduce wait times. Chipotle, Wingstop, Shake Shack, and Wendy’s are also set to report, offering a broader perspective on consumer spending in the restaurant industry.

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Finally, Intel will release its earnings report this week, and investors are eager to see how the chipmaker is navigating the challenges of the AI revolution. Years ago, Intel considered acquiring Nvidia, a company that has since grown into a tech giant worth trillions. Intel, on the other hand, has struggled to keep pace with the rapidly evolving AI landscape. The company’s stock has declined significantly, and while some analysts see potential for a short-term rebound, there is no quick solution to Intel’s current challenges.

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Overall, this week’s earnings reports will provide crucial insights into how some of the world’s largest companies are adapting to the changing economic landscape, driven in part by AI and shifting consumer behavior.

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