SerpApi.Org
The stock market could face its sternest test since the Iran war recovery this week, as a key component of the tech-led rally reports second-quarter earnings.
Google parent Alphabet, the world’s third-largest stock, will update investors on its second quarter activity after the close of trading on Wednesday, likely a few minutes after Elon Musk’s Tesla posts results for the three months ending in June.
The reports will kick off a long stretch of big-ticket earnings releases, including Microsoft, Meta Platforms, Amazon, and Apple next week, as investors face the market’s weeks-long stall.
The tech-focused Nasdaq Composite has slipped around 5% from its record highs in early June, while the S&P 500 has been effectively treading water since topping the 7500 point mark in mid-May.
Stocks are contending with significant headwinds, including the escalating war in the Gulf, which is leading to a worrying rise in crude oil prices and a subsequent leap in inflation risks that has the 10-year Treasury yield at its highest since 2023.
As companies report, then, the pressure will be on.
“The next two weeks will be a defining stretch for earnings, and not just for tech,” said Bret Kenwell, U.S. investment analyst at eToro. “The broader message is already clear: Companies that fail to clear Wall Street’s elevated bar are being punished.”
Last week, chip-design-machine-maker ASML posted better-than-expected second-quarter earnings, but saw its stock fall more than 4% over the next three sessions. TSMC, the world’s biggest contract chipmaker, fell 7.6% in the three days that followed its blowout second-quarter report.
In both cases, investors were underwhelmed by their “beat and raise” quarters, suggesting a massively high bar heading into Big Tech earnings this week.
That might make things tricky for Alphabet, which has soared nearly 20% over the past six months. Analysts are looking for revenue in the region of $117 billion, a 21% increase from the same period last year, with cloud revenue rising more than 60% to $22 billion.
Beyond that, investors will be listening for hints about its capital spending plans for next year, and for guidance on how long it will take to convert its $460 billion cloud computing backlog into topline sales.
Alphabet, which nearly doubled its 2024 spending tally of $52.5 billion last year, told investors in April that it will likely shell out around $185 billion over the twelve months ending in December.
Capex from the biggest AI hyperscalers, including cloud giant Oracle, could top $750 billion this year, with most of it aimed at building data centers, buying high-performance chips and establishing market leadership in the new technology.
By the end of the decade, according to Goldman Sachs, the global collective figure is likely to rise past $5 trillion.
“The AI investment cycle has entered a new phase where execution matters more than vision; great stories alone are no longer sufficient to support premium valuations,” said Mark Malek, chief investment officer at Siebert Financial. “Capital expenditure itself is not the problem. The problem emerges when spending persistently outpaces evidence of sustainable monetization.”
That assessment is playing out amongst the chip stocks that have benefited massively from the AI spending spree.
Micron Technology shares have nearly tripled since March of last year, and now carry a market value north of $1 trillion. Chip and memory stocks, collectively, have driven around 70% of the S&P 500’s 10% gain in the first half of the year.
That momentum has stalled since late June, however, with the PHLX Semiconductor index falling nearly 16% from its peak heading into Alphabet’s closely-watched report.
“The burden of proof has changed,” said eToro’s Kenwell. “Investors are no longer asking whether companies can withstand the uncertainty. They want growth and guidance strong enough to justify elevated valuations.”
Malek at Siebert agrees.
“The outcome of tonight’s reports will likely influence investor sentiment toward the broader AI ecosystem,” he said. “And subsequent technology earnings will be evaluated through the same lens.”
With tech stocks leading the market, and the AI investment theme driving the gains, this summer’s earnings run is hugely important. And Alphabet’s update might be the most significant of the bunch.
Write to Martin Baccardax at [email protected]