This Week, Two of the Magnificent Seven Report Earnings. The Biggest Profit Drivers Will Likely Be Only One.

The second-quarter earnings season is gaining momentum, with significant market activity anticipated on Tuesday as Tesla Inc. and Google parent Alphabet Inc., two prominent companies from the Magnificent Seven, report their quarterly results. These results will provide updates on the state of artificial intelligence, digital advertising spending, and the fluctuating demand for electric vehicles. They may also offer insights into how executives are preparing for potential industry changes if Donald Trump, endorsed by Tesla's CEO Elon Musk, wins the presidential election in November.

‍

These reports arrive as the stocks of these seven companies—Amazon.com Inc., Nvidia Corp., Microsoft Corp., Facebook parent Meta Platforms Inc., and Apple Inc.—continue to exert significant influence over the broader market. According to FactSet Senior Earnings Analyst John Butters, four of these companies are expected to be among the top five drivers of earnings growth for the S&P 500 index during this earnings season. Alphabet, Nvidia, Amazon, and Meta are projected to report year-over-year earnings growth exceeding 25% for the remaining two quarters of 2024. Tesla and Microsoft, however, are not expected to make the cut.

‍

In the upcoming week, 138 S&P 500 companies, including seven from the Dow, are scheduled to report quarterly results. Among them, United Parcel Service Inc. will report amidst uneven shipping demand and its preparations to handle air-shipping services for the U.S. Postal Service later this year. Toy manufacturers Mattel Inc. and Hasbro Inc. will also report, relying increasingly on games and media based on their toys to offset weaker toy demand. Chipotle Mexican Grill Inc. will report following a significant stock split and concerns about consumer spending trends due to higher food prices. Additionally, Southwest Airlines Co. and American Airlines Group Inc. will report, following a major tech outage that disrupted airports, raising concerns about excess unfilled seats and flights.

‍

Other notable companies reporting include General Motors Co., Ford Motor Co., Spotify Technology, and Coca-Cola Co.

‍

Tesla's earnings call is particularly noteworthy. Its stock has declined 3.7% this year, and it faces ongoing questions about electric-vehicle demand amidst growing competition and market saturation. Attention will also be on its broader tech ambitions, especially its progress on Full Self-Driving capabilities. Although Tesla has delayed the introduction of a new robotaxi to complete more prototypes, analysts believe a driver-ready robotaxi industry could still be years away due to technological and regulatory challenges.

‍

Despite these hurdles, Tesla's second-quarter deliveries exceeded expectations, and some analysts are optimistic about its smaller energy-storage business. Baird analysts recommend buying Tesla stock ahead of the results, citing a likely earnings beat due to a stable pricing environment, higher revenue from Full Self-Driving, and strong performance in its Energy Segment.

‍

The potential impact of a Trump presidency on Tesla is another factor to consider. Trump, who has received Musk's endorsement, has pledged to roll back emissions curbs and tax credits, which could affect EV demand. However, Wedbush analyst Dan Ives believes Tesla is large enough to thrive even if Trump imposes stricter environmental rules and trade barriers, as Tesla's scale and scope provide a competitive advantage against cheaper Chinese EV players.

‍

Alphabet's earnings will also be closely watched. Its shares have risen 27% this year, driven by strong performance in its digital-ad business and investor enthusiasm for artificial intelligence. In April, Alphabet announced its first-ever cash dividend and a $70 billion stock buyback. Despite some criticisms of Google's search function, RBC analysts note that search spending at Google has remained robust, and YouTube engagement is strong. They will focus on Alphabet's ability to manage costs while investing heavily in AI development, particularly any updates on its chatbot Gemini.

‍

Moody's analysts, however, caution that the massive investments by big tech companies in AI may not yield the expected returns. Increased competition could drive down prices, impacting margins and the sector's creditworthiness if investors demand higher returns.

‍

As the second-quarter earnings season unfolds, investors will be looking for signs of economic stability and insights into how companies are navigating a complex landscape of technological innovation, competitive pressures, and potential political changes.

‍