At present, investors' discussions about the earnings reports of tech giants are all centered on the field of artificial intelligence.
This week, the U.S. earnings season peaked with some 178 S&P 500 companies, which account for more than 40% of the index's total market capitalization, reporting results. Among them, Tesla, Meta, Microsoft, and Alphabet, the parent company of Google, among the "Big Seven" of U.S. stocks, have become the focus of the market.
Recently, U.S. technology stocks have been sold off, and the ratings of the six supergiants in U.S. stocks have been downgraded, and the market is hoping to find positive evidence from the earnings reports of large technology stocks.
AI is the focus
On April 25, Microsoft's financial report for the third quarter of fiscal year 2024 (that is, the first quarter of 2024 natural year) showed that AI-driven growth made the company's key indicators and businesses in the current quarter exceed expectations, with total revenue of $61.86 billion, higher than market expectations of $60.87 billion, a year-on-year increase of 17%, and exceeding the company's previous official guidance of 14.5%.
Among them, Microsoft's overall cloud revenue increased by 23% year-on-year to US$35.1 billion, and intelligent cloud revenue increased by 21% to US$26.7 billion. Azure revenue growth accelerated quarter-on-quarter, causing the stock price to rise more than 5% in after-hours trading.
It is worth noting that AI contributed 7 percentage points to Azure revenue this time, up from 6 percentage points in the fourth quarter of last year and 3 percentage points in the third quarter of last year.
Satya Nadella, Chairman and CEO of Microsoft, said, "Microsoft's AI assistant Copilot and the Copilot technology stack are ushering in a new era of AI transformation, driving better business outcomes for companies across all roles, across industries. ”
Some analysts pointed out that since Microsoft has invested $13 billion in OpenAI, the parent company behind the hottest generative artificial intelligence ChatGPT, it has become the leading standard-bearer of the AI track in one fell swoop, and its performance will not only determine the performance of the overall software industry in this earnings season, but also set the tone for this year's artificial intelligence adoption and development expectations.
Google's parent company, Alphabet and Microsoft, global digital advertising and search giants that have made big moves into AI, released their earnings reports for the first quarter of 2024 on the same day that beat expectations. Alphabet's stock price rose more than 15% to an all-time high after hours as both advertising and cloud revenue accelerated, all indicators exceeded expectations, and the first quarterly dividend in history.
Specifically, Alphabet's total revenue in the first quarter was US$80.54 billion, up 15% year-on-year, the fastest growth rate since the beginning of 2022, and higher than the market expectation of US$79.04 billion, and net profit jumped 57% year-on-year to US$23.66 billion, higher than the expected US$18.95 billion.
According to the earnings report, the company has integrated teams from Google Research and Google DeepMind focused on building AI models to further accelerate progress in the AI field.
While Meta reported excellent Q1 results on April 24, the stock fell 19% in after-hours as second-quarter revenue guidance fell short of market expectations and the company also planned to increase capital spending.
Specifically, Meta's revenue in the first quarter was US$36.455 billion, a year-on-year increase of 27%, and its net profit was US$12.369 billion, a year-on-year increase of 117%. Meta's core advertising revenue was $35.635 billion, accounting for 98% of total revenue, an increase of 26.8% year-on-year, better than the previous quarter's increase of 23.8%.
However, during the call, Meta founder and CEO Mark Zuckerberg released a message that he would continue to increase his investment in AI, which made investors worry about whether AI investment would fall into a bottomless pit, and Meta's stock price fell sharply after hours. Zuckerberg believes that Meta "should significantly increase its investment in the coming years to build more advanced models and the world's largest AI service." He added that these expenditures must "grow meaningfully" "before we can generate significant revenue from these new products".
Notably, Meta, Google, and Microsoft have all highlighted the scale of their investment in AI. Meta raised its capital spending forecast for this year by $10 billion, rising to $35 billion to $40 billion for the full year. The upward adjustment explained that "we will continue to accelerate infrastructure investment to support our AI roadmap".
Ruth Porat, Google's chief financial officer, said the company will spend about $12 billion or more on capital expenditures each quarter this year, most of which will be spent on building new data centers.
Microsoft expects its capital expenditures to increase significantly on a quarter-by-quarter basis, mainly driven by cloud computing and AI infrastructure investments, according to Microsoft CFO Amy Hood. The Company expects capital expenditures in FY2025 to be higher than in FY2024. But Hood stressed that this portion of spending in the year ahead "depends on demand and adoption of our services," and the company expects its operating margin to decline by just 1%.
Tech stocks diverged
In the first three weeks of April, U.S. tech stocks sold off. UBS said it downgraded the ratings of the six major U.S. technology stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia) to "neutral" from "overweight".
The market is currently very divided on the outlook for U.S. technology stocks. JPMorgan Chase & Co. warned that the market's earnings expectations may be too high, and that a weaker than expected performance could lead to a further downward and deep correction in the S&P 500.
According to DataTrek analyst Nick Colas, the "Big Seven" expects first-quarter profits to rise by 38% year-on-year, far exceeding the 2.4% growth expected by the S&P 500 as a whole.
Colas also said that without Amazon, Google, Meta, Microsoft and Nvidia, S&P's earnings would have fallen 6.0% in the first quarter, rather than the current 0.5% growth forecast.
Citi's calculations show that without the contribution of the Big Seven, the overall return of the US market would have fallen by 14%.
Amazon is expected to report first-quarter earnings at the end of April, while Apple and Nvidia will report earnings in early and mid-May, respectively.
Bank of America strategists have warned that there are higher risks for US tech giants to realize the promise of artificial intelligence against the backdrop of a possible slowdown in earnings. The bank expects that while the growth of these companies in the first quarter is still expected to be 39% higher than the same period last year, the increase is lower than the 63% increase in the last three months of 2023. The bank's strategists predict that the growth gap between the Big Seven and the rest of the S&P 500 could narrow by the fourth quarter, which could lead to a shift in money away from technology stocks and toward value-oriented stocks.
U.S. stock defense strategy
On April 25, data released by the U.S. Bureau of Economic Analysis showed that real GDP in the United States grew by 1.6% annualized in the first quarter of 2024, less than market expectations of 2.5%, the lowest level since the second quarter of 2022, and significantly narrower than the 3.4% in the fourth quarter of last year.
At the same time, personal consumption expenditures (PCE) rose 2.5% quarter-on-year from the preliminary month-on-month reading, a sharp slowdown from the previous value of 3.3% and also less than the expected 3%, while the core PCE price index, which excludes food and energy, rose 3.7% quarter-on-quarter on an annualized basis, exceeding expectations of 3.4% and almost double the previous value of 2%, marking the first quarterly increase in a year, indicating that core inflation remains stubborn.
After the release of the data, the interest rate swap market expected that the Fed would not start cutting interest rates until December.
Kathryn Rooney Vera, chief market strategist at StoneX Group, said that inflation has replaced recession as the Fed's top concern, and surging commodity prices combined with continued hot economic data form the backdrop for the market to enter a defensive strategy.
Marko Kolanovic, chief market strategist at JPMorgan Chase, said that although the results reported by US companies this week may temporarily stabilize the market, it does not mean that the stock market is out of trouble. He believes that complacency about stock market valuations, stubbornly high inflation, weakening expectations of Fed rate cuts, and overly optimistic earnings prospects have all exacerbated downside risks to equities. In a note to clients, he noted: "The stock market correction is likely to continue. Very high market concentration and expanding positions are usually red flags and there is a risk of reversal. ”