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Alphabet and Tesla Are Due to Report Results Wednesday Afternoon
Key Takeaways
- Alphabet and Tesla are slated to report Q2 earnings Wednesday afternoon, kicking off what’s expected to be another round of strong reports for the Magnificent Seven.
- The Mag 7 stocks have underperformed the S&P 500 this year amid uncertainty about the return on their AI investments.
The Magnificent Seven stocks may be more “Lag 7” than “Mag 7” this year, but their profits are still pretty magnificent.
The Mag 7—Nvidia (NVDA), Alphabet (GOOG), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Tesla (TSLA)—have grown faster than the rest of the S&P 500—or the “Other 493”—in every quarter since the end of 2022, and estimates suggest that was likely the case last quarter, too. In the coming weeks, the Mag 7 are expected to report earnings grew about 31% in the second quarter, a slowdown from 63% in Q1 but still ahead of the Other 493’s 23% growth.
Tesla and Google-parent Alphabet will be the first of the group to post Q2 results when they report after the bell Wednesday. Analysts expect the search and cloud computing giant had another strong quarter, with revenue projected to increase about 20%, driven by a 65% increase in cloud revenue. The report will set expectations for cloud computing competitors and fellow Mag 7 members Microsoft and Amazon, both of which are slated to report next week.
Why This Is Important to Investors
The Magnificent Seven earned their nickname in 2023 when their earnings and stocks soared as the economy and the rest of the stock market struggled. The tables have turned in the stock market this year, but the tech giants have continued to grow faster than most of the S&P 500.
Mag 7 stocks accounted for the vast majority of the S&P 500’s rise in recent years, but the group has lagged the broader market in 2026 amid uncertainty about the return on their huge AI investments. The Roundhill Magnificent Seven ETF (MAGS) is up less than 2% since the start of the year, trailing the S&P 500’s nearly 10% return.
The combination of stock weakness and earnings strength has many of the Mag 7 stocks trading at relatively undemanding valuations. “I don’t think there’s a problem paying 24 times forward earnings for a company that can grow high-margin revenue at roughly 20%,” said David Miller, CIO at Catalyst Funds, of Alphabet on Tuesday. “From a price-to-earnings-growth perspective, those numbers work.”
But the Mag 7’s earnings growth may not be Wall Street’s focus when they report in the coming weeks. Revenue and earnings “are likely to not matter as much as the amount of capital spending completed in the quarter and the guide for the rest of the year,” wrote Wolfe Research analysts on Tuesday. The hyperscalers—Alphabet, Microsoft, Amazon, Meta, and Oracle (ORCL)—reported strong results across the board last quarter, but their stocks mostly languished as investors focused on capex increases.
Hyperscalers are expected to spend upwards of $700 billion on capital expenditures this year, and much of that total is earmarked for AI data centers. Those investments have caused their free cash flows to dwindle, and compelled several of them to tap debt and equity markets for fresh capital, increasing their exposure to fluctuating interest rates.
Wolfe Research expects the hyperscalers in aggregate to increase their capex guidance again in the coming weeks. While that may pressure their stocks, it could reinvigorate the shares of semiconductor, memory and data storage suppliers, whose sales and earnings growth have been turbocharged by the AI data center buildout. After a torrid rally throughout the second quarter, memory and chip stocks have cooled off in recent weeks. Some market watchers say that’s created opportunities to own stocks expected to benefit from AI spending for years to come.
“Nvidia is trading like a value stock,” said Nancy Tengler, CEO of Laffer Tengler Investments, on Tuesday. “You have to believe all the [AI] spending is going to stop tomorrow” to justify the stock’s forward price-to-earnings ratio of about 16x, said Tengler.
Read the original article on Investopedia
