$Visa (V.US)$ Despite ongoing market disruptions caused by the Iran conflict, the largest technology stocks on Wall Street are being driven to new all-time highs. $S&P 500 Index (.SPX.US)$ Following a robust weekly performance, investors are now entering the busiest earnings week of the quarter, with results set to test the sustainability of this rally.
Super Earnings Week Kicks Off
The central focus of this week's market activity is undoubtedly the upcoming earnings reports from five of the 'Magnificent Seven' large technology companies. $Alphabet-A (GOOGL.US)$ 、 $Microsoft (MSFT.US)$ 、 $Amazon (AMZN.US)$and$Meta Platforms (META.US)$ Results are scheduled for release on Wednesday, $Apple (AAPL.US)$ with Thursday following up, leaving NVIDIA as the final highlight on May 20.
These five tech giants collectively hold a market capitalization of nearly $16 trillion, accounting for one-quarter of the S&P 500 Index’s total value. Keith Lerner, Chief Investment Officer at Truist Advisory Services, pointed out, "This will be a critical week where earnings need to validate this recent wave of gains."
Aside from the tech giants, this week’s earnings calendar is also packed: telecom operators $Verizon (VZ.US)$and$T-Mobile US (TMUS.US)$ will release their earnings on Monday and Tuesday respectively; payment giants $Visa (V.US)$and$MasterCard (MA.US)$ will announce their results on Monday and Thursday respectively; energy giant $Exxon Mobil (XOM.US)$ 、 $Chevron (CVX.US)$ , and $BP PLC (BP.US)$ 、 $Phillips 66 (PSX.US)$ The earnings reports of companies will provide clues to understanding the impact of the Iran war on energy markets.
Big Tech 'Magnificent Seven' Reports Earnings
The 'Magnificent Seven' of U.S. stocks drove the benchmark index to rise for four consecutive weeks, with a gain of 13%. Since the S&P 500 Index bottomed out on March 30, shares of Alphabet, Amazon, NVIDIA, and Meta have all risen by more than 25%.
This rally came after large-cap tech stocks dragged down the S&P 500 Index in the first three months of the year due to market concerns over excessive spending on artificial intelligence. This sell-off cleared investor positions in these stocks and compressed valuations, preparing the sector for a rebound.
Allen Bond, Portfolio Manager at Jensen Investment Management, stated that economic risks brought by the Iran war have driven up oil prices and may lead to persistently high inflation, making strong profit growth from tech giants appear even more attractive.
Compiled data shows that analysts expect the 'Magnificent Seven' to report a 19% increase in Q1 profits, compared to 12% growth for the rest of the S&P 500 Index components. So far, this group has made a strong start.
Last week, Tesla's first-quarter adjusted earnings exceeded Wall Street expectations, but concerns over a surge in capital expenditures overshadowed this achievement. NVIDIA, the world’s most valuable company by market capitalization, will release its earnings report on May 20.
Brian Barbetta, co-head of the technology team at Wellington Management and co-portfolio manager of the Global Innovation Strategy, which oversees approximately $5 billion in assets, stated: "We believe that the capital being deployed has a high return on investment, which will lead to faster growth and margin expansion over time."
Market Focus on 'AI Monetization Capability'
However, the scale of investment is impacting cash flow. Amazon's free cash flow for the first quarter is projected to be negative $13.3 billion, marking the largest shortfall since 2022, when investments in warehouses surged to meet pandemic-driven demand. Meanwhile, Meta’s free cash flow for the first quarter is expected to be $4 billion, the lowest level in nearly four years.
In response, some companies are tightening their spending. Meta and Microsoft are planning layoffs to help offset the impact of increased AI expenditures. Following the news of these measures on Thursday, shares of both companies fell.
Investors are likely to closely monitor the cloud computing businesses of these companies, as demand from AI startups such as Anthropic and OpenAI is driving rapid sales growth that is outpacing supply.
Revenue for Amazon Web Services, the largest cloud service provider, is expected to grow by 26% in the first quarter, while revenue for Microsoft Azure and Google Cloud is projected to increase by 38% and 50%, respectively. In the previous quarter, Azure’s 38% revenue growth failed to satisfy investors, causing Microsoft’s stock price to drop by 10% the day after the earnings report.
Valuation Changes in Large Technology Stocks
Bond, from Jensen, stated that the excitement surrounding Anthropic’s new AI services has alleviated many concerns about whether such investments will ultimately pay off. He added that while these developments have heightened anxieties among software manufacturers who may face disruption risks, they are a positive factor for large technology companies actively investing in the future.
Bond remarked, “These are incredibly strong businesses with high margins and remarkable consistency, and their valuations do not appear to be overstated. These giants exist in a different realm in terms of attractiveness.”
Fed Interest Rate Decision and New Chair Vote
This Wednesday, the Federal Reserve will announce its interest rate decision. The market currently expects a 99.5% probability that the FOMC will maintain the interest rate range of 3.5% to 3.75%.
Notably, this is not only one of the last two meetings chaired by Powell, but his political pressure has also seen a turning point. The Department of Justice recently dropped the criminal investigation into Powell regarding renovation cost overruns at the Fed building.
This clears political obstacles for Kevin Warsh, Trump's nominee for the next chair, to smoothly take over in May. LPL Financial Chief Economist Jeffrey Roach pointed out that the previous investigation “threatened the confirmation of Warsh’s appointment and heightened concerns about the politicization of the central bank.”
Now, both Powell and the Federal Reserve have a clear path forward, while the White House has saved face through a non-criminal investigation conducted by the Fed’s Inspector General.
The Senate Banking Committee has scheduled an executive session for 10 a.m. on Wednesday, during which a vote on Warsh’s nomination may take place.
Powell’s penultimate meeting as chair is expected to be relatively uneventful, with traders almost unanimously betting that the FOMC will keep rates unchanged at its April meeting.
Although Powell noted in March that economic data over the next six weeks would be “very important” for assessing the economic impact of the Iran war, the market expects Fed governors to continue following Powell’s approach of “waiting and seeing.”
Additionally, Thursday’s Personal Consumption Expenditures (PCE) price index data will also be closely watched, as it will provide investors and policymakers with insights into the current state of sticky inflation. The March data will be scrutinized for potential impacts from the Middle East conflict.
Editor/KOKO