This week's tech giants' trillion-dollar earnings report "sets the bar quite high"

Microsoft, Meta, Apple, and Amazon, the four major tech giants, will successively release their financial reports within two days this week. The performance of these companies, with a total market value of up to $11.3 trillion, will be a key test for whether the S&P 500 index can continue its upward trend.

The earnings season has started off strong, but all eyes are now focused on the upcoming highlights: Microsoft and Meta will announce their results on Wednesday, while Apple and Amazon will take the baton on Thursday. These financial reports will give investors a glimpse into the key health of businesses ranging from electronic devices and software to cloud computing and e-commerce.

Delivering a strong performance is crucial for maintaining the upward momentum of the S&P 500 index. These four companies—members of the "Mag7"—collectively account for one-fifth of the market capitalization of this benchmark index. More importantly, after Nvidia, Meta and Microsoft are among the three companies that have contributed the most to the rise of the S&P 500 index this year. As valuations climb, the market's focus is not only on whether they can exceed expectations but also on their outlook for the next few quarters.

"The bar is set quite high," said Michael Arone, Chief Investment Strategist at State Street Investment Management:

"Especially for the 'Tech Seven', they now need to deliver truly impressive results to keep this momentum going."

Earnings expectations have been lowered, but pressure remains

Despite a strong start to this earnings season, according to media data, about 82% of the companies in the S&P 500 index that have reported earnings so far have exceeded expectations, likely marking the best quarterly performance in nearly four years. This performance has driven the benchmark index up about 2% in the two weeks since the earnings season began.

However, analysts have significantly lowered their expectations over the past few months, mainly due to concerns about the impact of tariffs on consumer spending and profit margins. The earnings forecasts for large tech companies have also been downgraded.

Data shows that the expected year-on-year earnings growth for the "Mag7" in the second quarter is 16%, down from the 19% forecast at the end of March. Meanwhile, the expected year-on-year earnings growth rate for the S&P 500 index is 4.5%, also lower than the 7.5% forecast in March.

Despite the lowered expectations, the soaring prices of these tech stocks have kept the market's actual expectations high. Anthony Saglimbene, Chief Market Strategist at Ameriprise Advisor Services, believes that many companies may need to provide optimistic forecasts to justify their high valuations:

"They will likely need to indicate that the outlook for the remainder of this year or the next quarter is positive, whether by reaffirming or raising their earnings guidance." Since the beginning of this year, artificial intelligence has once again become the dominant theme distinguishing winners and losers in the stock market. Meta, Microsoft, and Nvidia have contributed nearly half of the S&P 500 index's gains this year, while some companies, including Apple, have seen their stock prices weaken due to setbacks in AI technology.

This divergence was particularly evident last week: Alphabet's stock rose after reporting strong earnings growth, while Tesla's stock plummeted due to bleak electric vehicle sales prospects. As a result, investors will closely monitor the capital expenditure plans of tech giants. Many companies have significantly increased their investments in AI infrastructure, making manufacturers of computing devices like Nvidia and Advanced Micro Devices some of the best-performing stocks this year.

The Test of Capital Expenditure and "Monetization"

All signs indicate that the capital expenditure boom among tech giants will continue. According to analysts' average expectations, Microsoft, Alphabet, Amazon, and Meta's total capital expenditures for this fiscal year are expected to reach $317 billion, further increasing to $350 billion by 2026.

In recent months, investors have rewarded this aggressive investment plan, with Meta's stock price rising about 22% this year. However, Gabriela Santos, Chief Strategist for the Americas at JP Morgan Asset Management, points out that investors ultimately need to see returns:

"Investors are increasingly straightforward in saying, 'Show us the real money.' At the current valuation levels, especially for large tech stocks, we need to see monetization, not just promises of monetization at some point in the future."

Although the valuation of the "Mag7" has rebounded from the lows caused by tariffs in April, it remains well below peak levels. The expected price-to-earnings ratio for this group is 28 times, compared to a high of 34 times in December last year; in contrast, the expected price-to-earnings ratio for the S&P 500 index is 22 times.

Tony DeSpirito, Managing Director and Head of U.S. Fundamental Equities at BlackRock, believes that valuations need to be considered in conjunction with growth prospects:

"While the price-to-earnings ratios of large tech stocks may appear high on the surface, when considering their growth, high free cash flow, and strong returns on invested capital, their pricing is attractive in many cases."