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Mag 7 earnings this week are pivotal as AI hype fades

Google-parent Alphabet will lead a key slate of mega-cap tech earnings this week as five of the world’s biggest companies, representing around $12 trillion in investor value, will publish September quarter updates focusing on AI spending plans.

The so-called Magnificent 7 tech stocks, which comprise around a fifth of the S&P 500, have driven outsized gains for the benchmark this year amid an ongoing AI investment frenzy. Many see AI as the most significant development in tech markets since the birth of the internet. 

The mega-cap cohort, however, has trailed other sector gains for much of the past three months, falling a collective 3.5% since early July. Investors have balked at the billions in capital spending needed to fulfill some of the group’s bolder ambitions. Instead, they’ve favored mid-cap and defensive stocks that tend to outperform in a lower-rate environment. 

AI spending plans will remain front-and-center this week, given Alphabet  (GOOGL) , Meta Platforms  (META) , Microsoft  (MSFT,)  and Amazon  (AMZN) , often referred to as hyperscalers, report September quarter earnings over the next four days.

Google, Amazon and Microsoft, along with Facebook parent Meta Platforms, are expected to spend billions in AI investments over the coming years. 

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Apple  (AAPL)  will also publish its fiscal fourth quarter update, slated for after the close of trading on Thursday. AI will be a key investor theme in its earnings report. The demand outlook for its newly launched iPhone 16 will be the market’s larger focus for near-term performance. 

Hyperscaler capex in focus

“It would be an understatement to say it’s a huge week for earnings as five of the largest companies in the world report,” said Jay Woods, chief global strategist at Freedom Capital Markets. “It’s so big that five of the six top market cap companies are set to report within a three day span.”

“Capex will continue to be a major focus as they spend feverishly due to strong AI demand,” he added. “We know about the big spend, but are we starting to see the benefits of their investments?” Woods said. 

Related: Analysts update Microsoft stock price targets ahead of Q1 earnings

AI-related technologies are expected to drive revenue gains for nearly all the world’s biggest tech giants over the coming years as companies look to leverage their massive datasets in order to enhance sales of everything from drive-through dining to the most complicated pharmaceutical testing.

Tapping into those data requires big investments in computing infrastructure, often based in virtual cloud computing environments, which are built and managed by so-called hypercalers like Alphabet’s Google Cloud, Microsoft’s Azure and Amazon Web Services (AWS).

Lots more AI spending to come

The four major hyperscalers represented around 80% of a record surge in tech capital spending plans over the second quarter, which grew by 51% from the same period last year, according to data from MTN Consulting.

At that rate, spending is now pegged at an annualized rate of $226 billion, with hyperscalers purchasing servers for data center facilities that are already in place and new ones set for completion over the coming years.

Meta’s finance chief, Susan Li, said her company’s 2024 capex would likely rise to between $37 billion and $40 billion, with “significant’ growth from that level in 2025. 

Related: Analyst adjusts Meta stock price target with earnings on tap

Google’s Ruth Porat, meanwhile, said capex for each quarter this year would be “roughly at or above” the first quarter tally of $12 billion

Amazon’s Brian Olsavsky said 2024 spending would be “higher in the second half of the year,” with the majority doled out on “support the growing need for AWS infrastructure as we continue to see strong demand in both generative AI and our non-generative AI workloads.”

Those spending plans, however, have dwarfed revenue gains for each of the five mega-cap tech names. Only Meta, which reported revenue growth of 24.3%, came close to its 33.4% capex surge (which was tallied at $8.472 billion).

AI revenue needs to fill the gap for Mag 7

That could be why Meta shares, which are up 33% over the past six months, have outperformed hyperscaler peers Microsoft (+6.5%), Amazon (4.6%) and Google (flat) over the same timeframe.

“As market giants gear up to report their latest earnings, the attention isn’t solely on revenue numbers but on how AI spending is reshaping these companies’ futures,” said Lukman Otunuga, senior market analyst at London-based FXTM.

“The potential for volatile price movements this week signals a critical juncture for these stocks, underscoring the market’s sensitivity to both AI and broader economic pressures,” he added. 

Related: Google breakup is on the table — What happens next in DoJ’s case

Some of those post-earnings moves are likely to be tied to both updates on capital spending and, concurrently, the timeframe under which the biggest tech companies expect to see monetization of their AI strategies. 

The gap between, meanwhile, needs to be filled with earnings growth from core business units, such as advertising at Google and Meta and cloud computing at Microsoft and Amazon.

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This is also true for Apple, although the near-term concern is its ability to grow iPhone 16 sales. The iPhone 16 is seen as the conduit for its broader AI rollout, as it shares some of the development costs with app developers and search engine providers like Google and Microsoft. 

“In a nutshell, investors need to see the monetization of AI spreading to the rest of the tech landscape and the next few weeks will be the linchpin to confirmation that the AI “use case phase” have now begun within the enterprise world,” said Wedbush analyst Dan Ives. 

“It starts with Big Tech … but this is just the tip of the iceberg for this 1995 Moment but clearly not a 1999 Tech Bubble moment as the eye-popping tech capex is the yellow brick road for this tech bull market continuing into 2025,” he added.

Related: Veteran fund manager sees world of pain coming for stocks


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