The earnings season is shifting to a higher gear this week, with scores of listed companies reporting, including Alphabet, Meta, Microsoft, Apple, and Amazon.
These technology giants, part of the “Magnificent Seven” group, account for roughly one-third of the S&P 500 index’s market capitalization. As a result, their performance determines the direction of this broadly followed index.
That’s why equity analysts closely follow the release of their financial results every quarter to determine what is most likely to come next for Wall Street.
For years, all five companies delivered solid earnings that beat analysts’ estimates, most of the time. For instance, Apple reported a 4.48 percent positive earnings surprise last quarter, while Amazon beat estimates by 17.1 percent.
At the same time, the companies in the group have strong advantages—referred to as “moats” in Warren Buffett’s terminology—to protect their market from competition.
Meanwhile, Apple’s brand name, iOS operating system, and extensive ecosystem have turned the smartphone innovator into a gatekeeper and toll collector of internet traffic.
Then, there is META, a leader in social media, Alphabet, which dominates the search engine industry and online video through Google and YouTube, and Amazon, a key player in e-commerce, cloud, and video streaming.
Dominant market positions have allowed all five companies to deliver superior returns to their capital holders, as measured by economic profit (EP) or value added (EVA).
Over the last five years, Microsoft’s EP has risen more than 80 percent, Apple’s EP rose by nearly 300 percent, and META’s more than doubled.
High economic profit has allowed these tech giants to accumulate a great deal of free cash, which boosts shareholder value through dividend hikes and share buybacks. For instance, Microsoft’s free cash flow has soared from around $32 billion in 2018 to $74 billion in 2024.
According to data compiled by Zacks.com, analysts expect all five companies to continue their solid performance.
Still, there could be surprises in the group, taking the tech-heavy Nasdaq for a wild ride.
Ido Caspi, research analyst at Global X ETFs, expects big tech company earnings this week, along with a mix of signals indicating ongoing health and innovation.
“More so, we expect to see further evidence of generative AI moving along its growth curve and continued shift from experimentation to widespread monetization,” he told The Epoch Times.
Caspi is watching for four things that will draw Wall Street’s attention. The first is AI-enabled revenue growth, which has become the buzzword of tech earnings reports in recent quarters. This growth has boosted third-quarter earnings across major tech players as AI integration in advertising, search, and cloud continues to yield strong results, driving efficiency and new revenue streams.
Second is advertising resilience, a significant factor for tech companies that rely on advertising revenues, like META and Google.
“Despite economic uncertainties, advertising demand appears steady,” Caspi said. “Growth in social commerce and AI-enhanced advertising products indicates solid ad revenue, with most companies likely reporting above-expected growth. For example, Alphabet’s Performance Max campaigns continue to drive incremental return on advertiser spend gain for advertisers through new AI tools. Meta is also leveraging its gen AI product leadership to improve its ad ranking infrastructure.”
Third is cloud services strength, a high-profit-margin business for all five tech giants.
“Increasing enterprise AI workloads will continue to bolster cloud revenues, and we expect companies like Amazon, Microsoft, and Alphabet to showcase steady demand as businesses prioritize digital transformation and infrastructure investments,” Caspi said.
Fourth, Caspi sees the potential for valuation increases where AI initiatives, advertising products, and social commerce growth outperform market expectations. “They could position these players for favorable [year-over-year] comparisons,” he concluded.
