Freedom Capital Markets chief global strategist Jay Woods said this week “We expect them to have solid earnings. We expect them to beat their EPS, Major focus now turns to AI demand — that they’re spending to meet that demand, and will eventually see benefits from that spend.” Recent earnings reports from big tech companies have led to a major market sell-off, highlighting the gap between ambitious AI investments and their immediate returns. Last Wednesday, the S&P 500 and Nasdaq Composite dropped sharply, with the S&P 500 experiencing its biggest decline since 2022. The “Magnificent Seven” tech stocks lost an enormous $750 billion in value, and the Roundhill Magnificent Seven ETF is now 11% below its recent highs. This drop reflects growing doubts about the short-term benefits of AI investments.
As the Federal Reserve’s July rate decision approaches, major tech players like Microsoft, Meta Platforms, Amazon, and Apple are under the spotlight, with their earnings reports eagerly awaited. Investors are looking for signs that AI spending is leading to profits. Despite heavy AI investments, gains seem mostly limited to cloud services, with broader benefits still unclear. Deutsche Bank’s David Folkerts-Landau points out the high costs and fierce competition in the AI race, suggesting that only a few companies will come out on top while others might fall behind.
Even with strong quarterly results, analysts think it might not be enough to turn around the tech sector’s current decline. Chris Senyek from Wolfe Research predicts ongoing market shifts due to possible Federal Reserve rate cuts and political changes. On the other hand, T. Rowe Price’s Dominic Rizzo believes that lower expectations might lead to better-than-expected earnings as the tech sector adjusts to changing market conditions. The balance between lowered expectations and continued AI investments will likely influence the tech market’s path in the coming months.
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