(Bloomberg) — The S&P 500 Index’s relentless advance to record highs faces a crucial test this week, with four technology behemoths worth a combined $11.3 trillion reporting earnings over a two-day stretch.
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This earnings season is off to a solid start, but now all eyes are on quarterly results from Microsoft Corp. and Meta Platforms Inc. on Wednesday, and Apple Inc. and Amazon.com Inc. on Thursday. The announcements will give investors a key glimpse into the health of businesses ranging from electronic devices and software to cloud-computing and e-commerce.
A strong showing is critical to sustaining the S&P 500’s rally. The four firms — members of the Magnificent Seven — account for a fifth of the market-capitalization-weighted benchmark. What’s more, Meta and Microsoft are among the top three point gainers in the S&P this year, after Nvidia Corp. With valuations climbing, the focus will be not only on whether they beat estimates, but also on their outlook for the coming quarters.
“The bar is set pretty high,” said Michael Arone, chief investment strategist at State Street Investment Management. “The Magnificent Seven in particular, they really need to deliver now to keep this momentum going.”
The S&P 500 dipped 0.1% on Monday, declining after five straight positive sessions. Investors were focused on a trade deal between the US and Europe.
So far, Corporate America appears to be taking President Donald Trump’s tariffs in stride. With about a third of S&P 500 members having reported, roughly 82% have beaten profit forecasts, on track for the best quarter in about four years, data compiled by Bloomberg Intelligence show. The performance has helped lift the benchmark by about 2% since the cycle kicked off around two weeks ago.
To be fair, analysts had slashed estimates over the past few months amid concerns about the impact of tariffs on consumer spending and profit margins. While Big-Tech projections have come down too, the surge in stock prices has kept expectations elevated.
The Magnificent Seven, which also includes Nvidia, Alphabet Inc. and Tesla Inc., is projected to deliver combined year-over-year earnings growth of 16% in the second quarter, according to data compiled by BI. That’s down from expectations of 19% at the end of March, before Trump announced his sweeping tariffs. Nvidia is the final member of the group to report, in late August.
The S&P 500, meanwhile, is expected to show annual profit growth of 4.5%, down from the 7.5% projected in March.
It’s all amping up the pressure on Big Tech. Many of the companies may need to give rosy forecasts to justify valuations, according to Anthony Saglimbene, chief market strategist at Ameriprise Advisor Services.
“They’re likely going to have to say that the rest of the year or the next quarter looks positive, either re-affirming guidance or even upping guidance,” he said.
AI Divergence
Some of Magnificent Seven have failed to live up to the moniker this year as artificial intelligence has again become the dominant theme separating winners from losers in the stock market. Meta, Microsoft and Nvidia account for nearly half of the S&P 500’s gain this year, while shares of companies including Apple have weakened amid struggles with the technology.
That divergence was on display last week, when Alphabet rose after reporting strong earnings growth, while a bleak outlook for electric-vehicle sales sent Tesla’s stock tumbling.
Investors will watch capital-spending plans particularly closely. Many companies have increased spending on AI infrastructure, which has made the makers of computing gear like Nvidia and Super Micro Computer Inc. some of the best-performing stocks of the year.
All signs point to that continuing. In total, Microsoft, Alphabet, Amazon and Meta are projected to pump $317 billion into capital spending in their current fiscal years, with that figure rising to $350 billion in 2026, according to the average of analyst estimates compiled by Bloomberg.
Awaiting Payoff
Investors have rewarded such aggressive plans in recent months, especially Meta, shares of which have rallied about 22% this year. But ultimately, investors have to see the payoff, says Gabriela Santos, chief strategist for the Americas at JPMorgan Asset Management.
“Investors are becoming much more overt in saying, ‘show me the money,’” she said. “At these levels, especially for large-cap tech, we need to see monetization rather than a promise of monetization coming at some point down the line.”
Magnificent Seven valuations have jumped from the depths of the tariff-induced selloff in April, but they still remain well below peak levels. The group is priced at 28 times projected profits, compared with a high of 34 in December while the S&P 500 is priced at 22 times.
“While Big Tech P/Es can look high on the surface, if you consider the growth and the high free cash flow and the strong return on invested capital, in many cases they’re attractively priced,” said Tony DeSpirito, global chief investment officer of BlackRock Fundamental Equities.
(Updates to afternoon trading.)
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