The Tech Industry is Spending Billions on AI. How Much Time Will Wall Street Allow for the Payoff?

The fourth-quarter earnings season is about to ramp up significantly, with several high-profile companies set to report results this week. Among them, the tech-heavy "Magnificent 7" companies will draw significant attention, as their performance could influence the market’s direction. This group, whose combined valuation rivals the GDP of entire nations, will face scrutiny amid tempered growth expectations and questions about the profitability of their massive investments in artificial intelligence (AI).

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The earnings spotlight begins on Wednesday, with Microsoft Corp., Tesla Inc., and Meta Platforms Inc., parent company of Facebook, unveiling their quarterly results. On Thursday, Apple Inc. will round out the week for major tech names. These results will come as industry leaders balance AI-driven ambitions with broader macroeconomic challenges.

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remains a critical focus for the tech sector and the market at large. Last week, former President Donald Trump announced plans to allocate $500 billion toward AI infrastructure, further fueling the sector’s momentum. Despite this, opinions remain divided on AI’s long-term impact. While some see it as a transformative force for productivity and profit, others view it as an overhyped trend, laden with risks for jobs, the environment, and global information ecosystems. After billions of dollars in AI investments last year, analysts are now debating whether 2025 will be the year investors demand tangible results.

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Some analysts predict 2025 could be a pivotal year for AI-driven returns, though others urge patience. Will Rhind, CEO of ETF provider GraniteShares, explained that investors are eager to see results but cautioned that the timeline for AI’s impact might take longer than anticipated.

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“We think this process will take time to play out,” Rhind said, though he emphasized the importance of intermediate progress. Similarly, Katie Nixon, Chief Investment Officer at Northern Trust Wealth Management, warned that investors hoping for immediate breakthroughs in AI could be disappointed. Still, she remains cautiously optimistic about the Magnificent 7's ability to adapt. “I’m not saying they’ll dominate as they have in the last two years,” Nixon said. “But I wouldn’t bet against them.”

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Nixon is also watching for details on the impact of Trump’s AI initiatives, including a joint venture called Stargate, which involves OpenAI, SoftBank Group, and Oracle Corp. Beyond AI, Nixon suggested that broader tech earnings could improve as IT budgets recover and government spending cuts deepen. However, she noted that the ongoing impact of tariffs on semiconductors remains a concern.

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Company-Specific Outlooks

Microsoft is expected to report “healthy revenue upside” from its Azure cloud services and Office platform, according to Bank of America (BofA) analysts. The demand for cloud migration projects remains strong, providing a stable growth engine for the company. Meanwhile, at Apple, concerns linger about demand for upcoming iPhones, particularly as the staggered rollout of AI-driven features struggles to gain widespread adoption.

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For Meta Platforms, analysts at Truist expect AI advancements and strong demand for advertising to bolster financial performance. Additionally, TikTok’s legal challenges could provide Meta with a competitive advantage. On the other hand, Tesla is navigating challenges after its first-ever annual decline in sales. While some analysts remain optimistic about the potential of autonomous vehicles, Elon Musk’s relationships with Trump and OpenAI remain variables to watch.

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FactSet anticipates the Magnificent 7 to deliver collective year-over-year earnings growth of 21.7% for the fourth quarter of 2024. However, this growth is expected to moderate to 17.7% in the first quarter of 2025 and 18.8% in the second quarter, before rebounding to 24.4% in the third quarter. These figures still surpass projections for the remaining S&P 500 companies, whose best quarter is forecasted to show earnings growth of 15.4% later this year.

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The market is also closely monitoring S&P 500 companies, which are collectively posting net profit margins of 12.1% for the fourth quarter. If sustained, this would mark the third consecutive quarter with margins above 12%, a level previously seen in 2021 and parts of 2022 and 2023. Analysts are debating the extent to which price increases have contributed to these robust margins.

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This earnings season follows strong performances from banks and Netflix Inc., which exceeded subscriber growth expectations. Katie Nixon described fourth-quarter earnings so far as “stronger for longer,” reflecting resilience in corporate profitability despite broader economic uncertainties.

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A total of 102 S&P 500 companies, including nine Dow 30 members, are set to report earnings this week. Key names include United Parcel Service Inc., where analysts are seeking signs of improvement in the package-delivery sector, and payment giants Visa Inc. and Mastercard Inc., which will provide insights into consumer spending trends following the holidays.

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Other notable reports include Levi Strauss & Co., which may update its “denim lifestyle” strategy amid potential plans to sell its Dockers brand. Intel Corp. will also report as speculation about AI-related missteps and potential takeovers persists. Additionally, Southwest Airlines Co. will face scrutiny over ongoing legal challenges, activist investor pressures, and financial concerns as it introduces premium-class seating.

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In defense, companies like Lockheed Martin Corp. and General Dynamics Corp. will report amid questions about how Trump’s administration might influence defense spending. Automaker General Motors Co. and airlines JetBlue Airways Corp. and Norfolk Southern Corp. are also on the radar.

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With the fourth-quarter earnings season accelerating, the performance of the Magnificent 7 and other key companies will set the tone for the market in 2025. From AI investments to evolving consumer trends, this week’s results will offer critical insights into how businesses are navigating challenges and capitalizing on emerging opportunities.

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