MW Big tech is spending billions on AI. How much time will Wall Street allow for the payoff?
By Bill Peters
Earnings Watch: Meta, Apple, Microsoft and Tesla report quarterly results, as analysts start to focus more on AI results. Earnings are also due from Starbucks and Boeing.
Fourth-quarter earnings season is about to get a lot busier this week.
But a lot of the market's reaction could come down to Wednesday and Thursday, when the first of the Magnificent 7 companies - the tech-oriented set whose combined size eclipses the GDP of some nations and major cities - start reporting results, amid expectations for slower growth and questions about when massive investments in artificial intelligence will pay off.
Microsoft Corp., $(MSFT)$ electric-vehicle maker Tesla Inc. $(TSLA)$ and Facebook parent Meta Platforms Inc. $(META)$ report results on Wednesday. Rounding out big tech's results for the week is Apple Inc., $(AAPL)$ which reports Thursday.
Those earnings will hit as big-tech executives try to cozy up to President Trump, and as artificial intelligence ambitions remain one of the main drivers for the industry and the market. Trump hopes to turbocharge both, announcing plans for $500 billion in investments in AI infrastructure last week.
But as companies race to find ways to incorporate AI into seemingly everything they do, observers have argued over whether it is a bottomless well of profit and productivity, or a bubble loaded with overrated technology threatening jobs, the environment and the world's information ecosystem. And after tech companies allocated billions toward building out AI last year, analysts debate whether this year is the one when investors start demanding results.
Some strategists have said 2025 could be that year. Others aren't so sure.
"Investors always want to see quick results, but we think this process is going to need to take some time to play out," said Will Rhind, founder and chief executive of ETF provider GraniteShares.
"I think it's fair to want to see some intermediate-term progress or at least indications that things are moving in the right direction because a lot of these companies are pushing all-in on AI," he continued.
Katie Nixon, chief investment officer for wealth management at Northern Trust, also said anyone looking for concrete results was likely to face some disappointment. She also said she expected the Mag 7's profit growth to ease.
"I'm not saying the Mag 7 is going to continue to dominate the way they have in the last two years," she said. "But what I am saying is: I wouldn't bet against them."
She said she'd also be looking for more detail on the potential impact from Trump's announcement on AI, under which OpenAI, SoftBank Group Corp. (JP:9984) and Oracle Corp. $(ORCL)$ will form a joint venture named Stargate. And outside of the Magnificent 7, she said, tech-sector earnings could gain momentum, as IT budgets thaw and, potentially, as government spending cuts deepen. But she said the possible impact of tariffs on semiconductors remained a point of focus.
Beyond AI, BofA analysts said to expect "healthy revenue upside" from Microsoft's Azure cloud-service segment and its Office platform, as customers' efforts to undertake cloud-migration projects remain "steady." But at Apple, they expressed concern about demand up ahead for new iPhones, due in part to the staggered launch of Apple Intelligence AI features, which they saw as "yet to gain widespread adoption."
Even as Meta retreats from DEI, fact-checkers and content moderation, analysts at Truist said they expected AI, demand for ads and TikTok's current legal limbo to benefit the company on a financial level. And as Elon Musk's relationships with Trump and OpenAI remain possible wild cards, Tesla is coming off its first-ever yearly sales decrease, although some analysts remain bullish on the prospect of autonomous vehicles.
FactSet, in a report earlier this month, said it expected the Magnificent 7, together, to report year-over-year earnings growth of 21.7% for 2024's fourth quarter. That's expected to slow to 17.7% in the first quarter of this year and 18.8% in the second, before accelerating to 24.4% in the third quarter and slowing again to 20.3% in the fourth.
Either way, those estimates are still better than anything expected out of the 493 companies that comprise the rest of the S&P 500. The best quarter for those companies is expected to be the fourth quarter of this year, with 15.4% earnings growth.
Even as concerns about inflation and the consumer endure, fourth-quarter net profit margins so far for the companies in the S&P 500 Index, collectively, are trending at 12.1%, according to a FactSet report released Friday.
If that figure holds, it would mark the third straight quarter of profit margins above 12%. Margins crossed those levels in 2021 and in parts of 2022 and 2023, raising questions about the role price increases played in propping them up.
But the current profit expectations will follow solid quarterly results from the big banks and Netflix Inc. $(NFLX)$, which reported subscriber figures that were far above Wall Street's expectations.
"Stronger for longer," Nixon said of fourth-quarter earnings so far.
This week in earnings
For the week ahead, 102 S&P 500 companies, including nine on the Dow 30, will report quarterly results, according to FactSet.
Notable companies reporting include United Parcel Service Inc. $(UPS)$, as analysts look for any signs of improvement in the package-delivery industry this year. Earnings from Visa Inc. (V) and Mastercard Inc. $(MA)$ will offer a look at consumer spending, in the wake of the holidays and the election.
Financials and commentary from Levi Strauss & Co. $(LEVI)$ will offer a refreshed look at the jeans-maker's ambitions to sell more people on a "denim lifestyle" while it weighs a potential sale of its Dockers business. Intel Corp. reports amid takeover speculation, in the wake of missteps on AI. And amid expectations for strong travel demand, Southwest Airlines Co. $(LUV)$ reports as the airline faces a government lawsuit over "chronic flight delays," a fight with an activist investor and questions about its stock price and financials, as it brings assigned and premium-class seating to its flight cabins.
Defense contractors Lockheed Martin Corp. $(LMT)$, General Dynamics Corp. $(GD)$ and Northrop Grumman Corp. $(NOC)$, amid questions about how the new Trump administration might handle defense spending. General Motors Co. $(GM)$, JetBlue Airways Corp. $(JBLU)$ and Norfolk Southern Corp. $(NSC)$ also report. IBM $(IBM)$ reports as well.
The call to put on your calendar
More grim, less grim for Boeing? Boeing Co. $(BA)$ began 2024 with a mid-flight blowout on a jet being operated by Alaska Airlines that grounded dozens of airplanes and reignited scrutiny over the jet-maker's production standards and culture. On Thursday, the jet-maker said it expected losses for the fourth quarter of that year that were far steeper than Wall Street expected, as it faced costs related to job cuts, a strike that hobbled production, and expenses and losses related to defense projects. One analyst called the losses "eye-watering." But the difficulties were, to some degree, expected. When Boeing reports quarterly results on Tuesday, the earnings release and call could provide more detail on what the company expects as it enters a new year, as it continues to deal with the fallout from one of its most difficult in recent memory.
The number to watch
Starbucks sales: Coffee chain Starbucks Corp. has a lot of ideas on how to reverse a rough 2024 marked by cautious consumers, competition in China and falling same-store sales. When it reports quarterly results on Tuesday, executives will likely offer detail on how that turnaround is going. The chain's new chief executive, Brian Niccol, wants to bring back condiment bars, ceramic mugs, warmer vibes, comfier chairs, a separate mobile-ordering area and plans to de-clutter the ordering process overall. But the company has warned that it will likely be cutting some jobs. And analysts still expect slipping sales, and have worried about the costs to revive its fortunes.
-Bill Peters
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(END) Dow Jones Newswires
January 26, 2025 10:02 ET (15:02 GMT)
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