The stock market has been turned on its head in recent weeks, and the ride may get wilder this week with the majority of the Magnificent Seven reporting earnings at a critical juncture for the group.

Bank of America estimates that more than one-third of aggregate S&P 500 earnings will be reported this week. That’s in large part because Microsoft (MSFT) will report Tuesday afternoon, Meta’s (META) results come when markets close Wednesday, and Apple (AAPL) and Amazon (AMZN) are both slated to report after the bell on Thursday. Those four companies account for nearly 20% of the S&P 500 index—about as much as the Health Care and Industrial sectors combined. 

Big moves in their stocks would take major indexes in tow, and markets may be on edge heading into this week’s reports after Tesla (TSLA) and Alphabet (GOOGL) earnings sent tech stocks spiraling last week, pulling the sector into a correction and leading the S&P 500 to notch its worst day since December 2022.

Any weakness in this week’s big tech earnings could widen the cracks that began to show last week. They could also feed into or challenge the narrative coalescing around spending on artificial intelligence (AI) that has weighed on sentiment lately.

AI Spending Concerns in the Spotlight

The Magnificent Seven is expected to report earnings grew 30% from the second quarter last year, when profits totaled more than $81 billion, according to Bank of America. That would represent a slowdown from the prior quarter, but would still far outpace the rest of the S&P 500’s profit growth at 6%.

Two of the companies reporting this week—Meta and Amazon—are expected to be among the largest contributors to aggregate S&P 500 earnings growth. Yet, results from Alphabet last week demonstrated that robust earnings growth may not be enough for Wall Street. 

Alphabet reported earnings increased 28% in the second quarter, exceeding analysts’ estimates. However, the stock tumbled as investors homed in on capital expenditures, which nearly doubled from last year as Google invests heavily in AI infrastructure to keep up with cloud computing rivals Microsoft and Amazon. Alphabet CEO Sundar Pichai defended the company’s spending, saying that the risk to Google of underinvesting in AI was greater than the risk of overinvesting. 

“The CapEx rates are definitely elevated,” said CFRA analyst Angelo Zino. “But the way we look at it, higher CapEx should not be viewed as a disappointment. We think it’s healthier dollars spent than increasing OpEx, which is not what these companies are necessarily doing.”

Still, spending has become an overhang for the tech giants. “With job openings down in 2Q,” said Bank of America analysts of Meta’s upcoming report, “we don’t anticipate a repeat of last quarter’s higher ’24 expense guidance, though higher legal & capex are risks.”

Watching AI Monetization

Amid concerns about AI-related costs, executives may be keen to emphasize how AI is already adding to revenue or expanding margins.

“There’s kind of a misperception out there that some of these companies are not monetizing [AI],” said Zino. Microsoft, he noted, grew its Azure and cloud services business by 30% in the first quarter, about 7 percentage points of which came from AI services. “The problem is it’s coming off such low levels that it’s not a huge impact on the broader business,” he added.

Beyond cloud growth, AI could be benefiting these companies in less easily quantifiable ways, said Zino. “You’re seeing things like digital ad spend accelerating this year, and my belief is part of that is because of the improvements that you’re seeing on their platforms.”

Will the Market Rotation Continue?

The latest earnings from big tech come amid a massive market reorientation. The tech stocks that propelled markets to records in the first half of the year have fallen into a correction as investors rotated into small-cap stocks on hopes that they could benefit from imminent interest rate cuts.

For their part, Wedbush analysts aren’t too concerned with hyperscalers increasing their spending. “We believe this tech sell-off will be short lived as the Street better digests results and commentary from the broader tech sector,” wrote analysts in a note on Thursday.

Zino also suggested that while more of a rotation could still be in store for markets, the pullback for tech stocks could prove temporary, potentially presenting “a very nice opportunity for long-term investors.”