Mag 7 still a 'source of growth' as Big 5 report this week?

The US stock market earnings season is reaching its climax. This week, five of the tech giants in the Mag 7—Google, Meta, Microsoft, Amazon, and Apple—will successively release their latest financial reports. Can tech stocks continue their upward momentum?

Wall Street forecasts that the profit growth rate of the Mag 7 in the third quarter will increase by more than 18% year-on-year, a significant drop from the 37% growth in the second quarter. However, it is expected to continue outperforming the overall profit growth expectation of the S&P 500, which is around 3-4%.

Among them, Alphabet, the parent company of Google, is expected to achieve double-digit percentage year-on-year revenue growth, while the revenue growth rates of Apple, Meta, and Amazon are only in the single digits.

Ido Caspi, an analyst at Global X, expects that the overall profits of tech giants in the third quarter will continue to be robust, and the commercialization of AI has already shown initial results:

"Overall, we expect the profits of large tech companies... to show stable operational performance, revenue acceleration led by artificial intelligence, and resilient advertising revenue that signals ongoing health and innovation."

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"More importantly, we expect to see more evidence that generative AI is progressing along its growth curve and continuing to shift from the experimental phase to widespread commercialization."

Are tech stocks still a source of growth?

Although tech stocks were the main driving force behind the S&P's repeated historical highs in the first half of the year, market funds have begun to shift towards industries such as real estate, utilities, and finance, driven by factors such as the Federal Reserve's interest rate cuts. Investors have started to question whether AI can truly bring growth potential to tech companies.

Since July 10th, the cumulative returns of the Mag 7 have significantly lagged behind other industries, recording a 2% decline, while sectors including utilities, real estate, finance, and industry have all risen by more than 10%.Moreover, the valuation of Mag 7 remains at historical highs. For instance, Apple and Microsoft are expected to have price-to-earnings ratios of 32 and 33, respectively, both exceeding their average levels over the past decade (20 and 25, respectively).

Michael O'Rourke, Chief Market Strategist at Jonestrading Institutional, commented:

"Although the earnings of the S&P 500 (excluding Mag 7) are expected to grow very little, its valuation is more attractive."

In addition to macroeconomic factors, tech giants are also facing stricter regulations, massive capital expenditures on AI, and other significant challenges. Ross Mayfield, an investment strategist at Baird, anticipates that tech stocks may struggle to regain their leadership position before the end of this year.

However, despite the expected slowdown in earnings for tech giants this quarter, Wall Street remains generally optimistic about their prospects.

Data compiled by Bloomberg shows that about 90% of analysts have a buy rating on the stocks of Microsoft, Alphabet, and Nvidia. The percentage of buy ratings for Alphabet is 83%, for Apple it is 65%, while the average for the S&P is only 53%.

Andrew Choi, Portfolio Manager at Parnassus Investments, stated that despite various concerns, tech stocks still offer above-average profit growth, artificial intelligence exposure, strong capital returns, and lower risk compared to other sectors.

Ross Mayfield said:

"Obviously, (tech companies) earnings growth is slowing down, and valuations might be a bit high. But they still bring such significant growth, and there is still a substantial upside potential for earnings in the coming years."

Mark Malek, Chief Investment Officer at financial services firm Siebert, remains bullish on tech stocks, stating that:"I know many well-known asset individuals have stood up and said, 'We are no longer buying,' but the current data is still good. Compared with other industries, where else can you get such growth potential?"

What is the market focusing on?

Malek from Siebert believes that, specifically in terms of individual company financial reports, he will pay close attention to the following:

Google: The dynamics and commercial progress of the AI assistant Gemini, including how Gemini forms a new business model with advertising, YouTube, and cloud services.

Meta: The dynamics of the Llama model, as well as advertising revenue on platforms such as Instagram.

Microsoft: Cloud service revenue and related dynamics of the Copilot AI assistant.

For Apple, the company is still facing doubts about whether the iPhone 16 with AI capabilities can stimulate a "replacement wave." Synovus analyst Dan Morgan believes that investors will focus on whether the company's core retail business will improve.

In addition, AI-centric capital expenditures will continue to be a major focus of market attention.

Bloomberg estimates that Microsoft, Alphabet, Amazon, and Meta are expected to invest a total of about $56 billion in capital expenditures, a 52% increase compared to the same period last year.