Big Tech Has a Lot to Prove This Week. Why Mag 7 Earnings Will Matter for the Entire Stock Market

Big Tech earnings are back again.

Meta stock has jumped 63% this year.

If you’re wondering what’s at stake, look no further than Google-parent Alphabet and Instagram-owner Meta Platforms. Shares of the two have gone in different directions since their last earnings reports, but they both—and the rest of the so-called Magnificent Seven reporting this week—have plenty to prove.

Tech stocks have been eagerly watched this year. Excitement for generative artificial intelligence has helped push shares of those megacaps— Nvidia, Meta, Alphabet, Apple, Amazon.com, Microsoft, and Tesla—and the rest of the market to new heights. All but Nvidia and Tesla report this week, marking what will be a crucial few days for the stock market.

“A lot of investor dollars are at stake here, and the margin for error continues to get smaller and smaller each quarter, just given how strong they’ve been the last few quarters,” Ido Caspi, research analyst at Global X ETFs, told Barron’s. He added that expectations are high and the Mag Seven stocks make up a big portion of the S&P 500 and other major indexes.

Of the five companies reporting this week, each has contended with plenty of headlines since their last earnings reports some three months ago. That batch of earnings coincided with a rotation of profits out of megacap stocks and into smaller cap companies that benefit more from the Federal Reserve’s interest-rate cuts. The Nasdaq Composite has recovered since but is still trading below its record high, unlike the S&P 500.

And shares of some of the Mag Seven still haven’t recovered.

Alphabet stock has dropped 2.1% as of Monday over the past 63 trading days, which roughly corresponds to the last earnings season. There have been concerns that the company is spending too aggressively on AI without an indication of when there will be returns on those investments. There are also questions regarding competition and possible loss of market share as other search engines, like ChatGPT, rise in popularity. On top of those concerns, there are regulatory problems as a judge recently ruled that Google had a monopoly on general search services and general text advertising.

Alphabet’s shares are now trading at 19.4 times earnings expected for the next 12 months, which is lower than its five-year average of 23 times. A lower valuation and stock price means there aren’t such heavy expectations for earnings, which should give investors some breathing room.

“If they do provide something in line or above consensus like we think, [the stock] can shoot up a lot higher,” Caspi, at Global X, said. “The valuation’s a little bit more reasonable. I think investors are willing to take a little bit less of an impressive print than if it was fully maxed out.”

On the other end of the spectrum, there’s Meta.

The Facebook-parent has had a blowout year, with shares surging 63%. Meta stock has risen 25% over the past 63 trading days. Investors see the company as an AI winner and are also confident in its virtual reality hardware projects.

But the downside of such a run is that the stock looks expensive and expectations for strong earnings are even higher. A simple beat won’t be enough to push up shares that are trading at 24 times forward earnings. Meta has to prove to the market it deserves its premium valuation and that major growth is ahead.

The rest are more of a mixed bag. Shares of Amazon, Apple, and Microsoft have all risen over the past 63 trading days, but not to the extent of Meta: Amazon has gained 3.7%, Apple 6.7%, and Microsoft 0.9%.

Despite the more muted moves, expectations are still high for Amazon and Apple, which are outperforming or just about in line with the S&P 500. Amazon investors will want to see signs of growth in the company’s AWS cloud business, while Apple will need to show some proof that iPhone demand isn’t weak.

Microsoft stock, meanwhile, has only risen 13% this year compared to the 22% increase of the S&P 500. Heavy investments in AI are a concern. But with an underperforming stock, investors may be more lenient about the results the company provides on Wednesday.