The stock market is about to face a big test.
Meta and Amazon, among other tech giants, are getting ready to share their earnings reports, and investors are holding their breath.
Especially after Tesla shares took a hit recently, showing that traders don’t take kindly to disappointing numbers.
The ‘Magnificent Seven’: Driving Force Behind S&P 500’s Climb
There’s a group of tech big shots called the ‘Magnificent Seven’ that has been driving the S&P 500’s climb this year.
Talking about Google’s parent Alphabet, Amazon, Apple, Meta Platforms (formerly Facebook), Microsoft, Nvidia, and Tesla.
They’re opening their financial quarters’ books soon, which will give everyone a better idea of whether the tech sector, and the wider market, still have some steam left.
So far this year, the S&P 500 has jumped 11%, thanks to dividends.
But without these seven tech champs, that growth would have been less than 1%.
That’s according to the number crunchers at S&P Dow Jones Indices.
Betting on Big Tech: A Look Back and Ahead
Now, betting on big tech has usually been a good move for U.S. investors, though it had its rough patches, like last year.
This year, the hype around artificial intelligence has gotten more people excited about tech shares again.
Plus, with the economy acting shaky, many are leaning towards the big, stable companies as a safer bet.
These tech companies are not just about potential growth anymore; they’re raking in big profits already.
In 2022, they made up 17% of the S&P 500’s earnings per share, and experts at Goldman Sachs Group think that number will jump to 24% by 2025.
Bryant VanCronkhite from Allspring Global Investments says, “The growth these companies show is super important. It helps people gauge how healthy the market is.”
The earnings report schedule is packed. Microsoft and Alphabet are up first, followed by Meta, and Amazon.
Apple and Nvidia will share their numbers the following week.
Some financial folks think that if the big tech companies report weak earnings, it might make investors second-guess the high prices they’re paying for stocks.
Tesla’s Slip: A Wake-Up Call for Tech Stocks?
The recent drop in Tesla’s stock price showed that the market is ready to give a cold shoulder to tech giants that don’t meet expectations.
Tesla shares dropped 9.3% after it missed sales and earnings targets. Plus, Tesla’s boss, Elon Musk, mentioned some snags in rolling out the much-awaited Cybertruck.
James Abate from Centre Asset Management points out, “When a big player like Tesla shows disappointing numbers, it can make investors nervous, affecting not just Tesla but the whole market’s value.”
Right now, the S&P 500 is trading at nearly 18 times its projected earnings, which is pretty normal compared to the last ten years.
However, with government bond yields rising to levels not seen in a long time, some investors are thinking stocks are pricey and are looking at bonds as a safer choice.
High Valuations: A Red Flag for Investors?
There’s also some legal drama in the tech world.
Last month, Amazon got slapped with a lawsuit from the Federal Trade Commission and 17 states, accusing it of using its big-footed monopoly power unfairly.
Meanwhile, Google is fighting off an antitrust case from the Justice Department, and Apple is dealing with business restrictions in China, a key market for them.
The ‘Magnificent Seven’ now make up 30% of the S&P 500’s market value, a jump from 22% last year.
This means if their share prices move up or down, they can swing the index too.
Many investors feel that these stocks are pricey compared to the companies’ earnings, which could set them up for a fall.
Carin Pai from Fiduciary Trust International warns, “These stocks are trading at high values.
If they don’t live up to the hype, that’s a big risk for the stock market.”
Final Thoughts
The upcoming earnings reports from big tech companies like Meta, Amazon, and others are a crucial moment for the stock market.
The performance of these tech giants, often termed as the ‘Magnificent Seven’, has been a significant driver for the S&P 500’s growth this year.
As these companies prepare to reveal their financial health, investors are on edge, especially after witnessing Tesla’s shares take a hit due to disappointing results.
The financial performances of these companies don’t just reflect on their individual stocks, but have a ripple effect across the market, potentially impacting investor confidence and stock valuations broadly.
With some legal challenges and economic uncertainties in the backdrop, and rising interest in alternative investments like government bonds, the stakes are high.
Moreover, the tech sector is under a microscope with high expectations around their growth, especially in the realm of artificial intelligence.
If these companies don’t meet the expectations set by investors and analysts, it could trigger a re-evaluation of stock prices not just in the tech sector, but across the board.
As the earnings reports unfold, they will not only unveil the financial performance of these companies but also provide a broader picture of market health and possibly dictate the market’s direction in the near term.
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