Magnificent 7 Earnings Preview

Overview

The focus is on the "Magnificent 7" tech giants as they prepare to report their earnings after the US market closes. This includes Meta, Microsoft, Amazon, and Alphabet. The tech sector has shown strong momentum, with the Nasdaq and S&P 500 reaching record highs recently. However, the rally is currently on pause as investors await these crucial earnings reports.

Key Earnings Expectations

• Microsoft: Expected revenues of $81.4 billion for the last quarter, with capital expenditures (capex) projected between $110-120 billion for 2026. Microsoft has announced it will end its exclusive deal with OpenAI but will remain a significant shareholder. Its P/E ratio stands at 26.58x earnings.
• Meta: Anticipated revenues of $55.8 billion, with capex spending expected to be between $60-65 billion this year. The P/E ratio is 28.8. Recently, Meta's partnership with Manus, a Chinese AI provider, was terminated by the Chinese government amid geopolitical tensions.
• Amazon: Expected to report sales of $177.28 billion, with earnings per share projected at $1.63. Amazon's capex commitment is the largest among its peers at $200 billion for this year, with a P/E ratio of 36.4x earnings.
• Alphabet (Google): Expected sales of $106.9 billion, driven by advertising and cloud services, with capex expected between $175-185 billion. Alphabet has seen a 10% increase in share price this year.

Capital Spending Focus

Investors are particularly focused on capital spending plans, which may be more significant than revenue figures. The companies had previously announced their capex plans, and any revisions could negatively impact market sentiment. Investors are keen to see if these companies can demonstrate that their AI investments are yielding results, especially in cloud computing and AI product sales.

Impact of External Factors

While AI remains a focal point, the digital advertising market's performance is also critical, especially for Meta, Alphabet, and Amazon. Recent events in the Middle East may affect advertising spending, particularly from sectors like airlines and travel, which could lead to a decline in revenue for these companies.

Broader Market Implications

The earnings results from these companies are vital for the broader market, as they have significantly contributed to the S&P 500's growth over the past four years. Collectively, they are expected to invest $600 billion in AI this year, which is crucial for the tech supply chain, including chip manufacturers like Nvidia and AMD. Any indication of a slowdown in AI investment could trigger a sell-off across the tech sector.

Market Expectations

The options market anticipates significant volatility following the earnings reports, with Amazon expected to move 4% and Meta 7% in either direction. The market is currently priced for perfection, leaving little room for error in the upcoming results.