Despite ongoing market disturbances from the Iran conflict, major Wall Street technology stocks have propelled the S&P 500 to a record high. Following a strong week of trading, investors are now facing the busiest earnings week of the quarter, the results of which will be crucial for assessing the sustainability of the current rally.
The core focus this week is undoubtedly the earnings reports from five of the so-called "Magnificent Seven" mega-cap tech companies. Alphabet, Microsoft, Amazon.com, and Meta Platforms, Inc. are scheduled to announce their results on Wednesday, followed by Apple on Thursday. NVIDIA is set to report last on May 20th. These five tech behemoths have a combined market capitalization approaching $16 trillion, accounting for a quarter of the S&P 500's total value.
Keith Lerner, Chief Investment Officer at Truist Advisory Services, noted, "This will be a pivotal week. The earnings need to validate the recent surge in stock prices."
Beyond the tech giants, this week's earnings calendar is packed. Telecommunications operators Verizon and T-Mobile will report on Monday and Tuesday, respectively. Payment giants Visa and Mastercard are scheduled for Monday and Thursday. Earnings from energy majors like ExxonMobil, Chevron, BP, and Phillips 66 will offer insights into the impact of the Iran conflict on energy markets.
The "Magnificent Seven" have driven the U.S. stock market benchmark to a 13% gain over four consecutive weeks of advances. Since the S&P 500 bottomed on March 30th, shares of Alphabet, Amazon.com, NVIDIA, and Meta Platforms, Inc. have each surged more than 25%. This rally followed a sell-off in the first quarter, where concerns over excessive spending on artificial intelligence dragged down the index. That sell-off cleared out investor positions and compressed valuations, setting the stage for a rebound.
Allen Bond, a portfolio manager at Jensen Investment Management, suggested that economic risks from the Iran conflict, which have pushed oil prices higher and could lead to persistent inflation, make the strong earnings growth of tech giants appear more attractive. Compiled data shows analysts expect the "Magnificent Seven" to post a 19% earnings increase for the first quarter, compared to 12% growth for the rest of the S&P 500.
So far, the group has started positively. Last week, Tesla Motors reported first-quarter adjusted earnings that beat Wall Street expectations, though concerns about a surge in capital expenditures overshadowed the result. NVIDIA, the world's most valuable company, will be the last to report on May 20th.
Brian Barbetta, Co-Head of the Technology Team and Co-Portfolio Manager for the Global Innovation Strategy at Wellington Management, which manages approximately $50 billion in assets, stated, "We believe the capital being deployed offers a high return on investment, which should lead to faster growth and margin expansion over time."
However, the scale of investment is impacting cash flows. Amazon.com's first-quarter free cash flow is projected to be negative $13.3 billion, which would be its largest shortfall since 2022, a period marked by a surge in investments like warehouses to meet pandemic-driven demand. Meta Platforms, Inc.'s free cash flow is expected to be around $4 billion, its lowest level in nearly four years.
In response, some companies are tightening their belts. Meta Platforms, Inc. and Microsoft are planning job cuts to help offset the impact of increased AI spending. Shares of both companies declined after news of these measures emerged on Thursday.
Investors are likely to pay close attention to these companies' cloud computing businesses, where demand from AI startups like Anthropic and OpenAI is driving rapid sales growth that exceeds supply. Revenue at Amazon Web Services, the largest cloud provider, is forecast to grow 26% in the first quarter, while Microsoft's Azure and Google Cloud are expected to see revenue increases of 38% and 50%, respectively. Last quarter, Azure's 38% growth failed to satisfy investors, leading to a 10% drop in Microsoft's share price the day after its earnings report.
Allen Bond of Jensen noted that excitement over new AI services from companies like Anthropic has alleviated some concerns about whether such investments will ultimately pay off. He added that while these developments heighten anxiety for software makers potentially facing disruption, it is a positive factor for large tech companies actively investing in the future.
"These are exceptionally strong businesses with high margins and great consistency. Their valuations do not appear overstretched. These giants exist in a different world in terms of attractiveness," Bond said.
The Federal Reserve will announce its interest rate decision on Wednesday. Markets are currently pricing in a 99.5% probability that the FOMC will maintain the federal funds rate in the 3.5% to 3.75% range. Notably, this is the second-to-last meeting chaired by the current Fed Chair. A political cloud has also lifted, as the Justice Department recently dropped a criminal investigation into the Chair regarding the costs of renovating the Fed's headquarters. This removes a political obstacle for Kevin Warsh, nominated by the former administration, to potentially succeed as Chair in May.
Jeffrey Roach, Chief Economist at LPL Financial, pointed out that the previous investigation "threatened the confirmation of Warsh's appointment and heightened concerns about the politicization of the central bank." Now, a clearer path lies ahead for the Fed and the Chair, while the administration has saved face through the Inspector General's non-criminal review.
The Senate Banking Committee has scheduled an executive session for 10 a.m. on Wednesday, where a vote on Warsh's nomination may occur. The Fed meeting, the penultimate one chaired by the current leader, is expected to be uneventful, with traders almost unanimously betting the FOMC will hold rates steady. Although the Chair stated in March that data over the next six weeks would be "very important" for assessing the economic impact of the Iran conflict, markets expect Fed officials to continue "waiting and watching," as previously indicated.
Additionally, Thursday's Personal Consumption Expenditures (PCE) price index data will be closely watched, providing investors and policymakers with a reading on the current state of persistent inflation. The March data will be scrutinized for potential effects stemming from the Middle East conflict.
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