Big Tech Earnings Kick Off: Will AI Hype Fuel Growth or Put Pressure on Margins?
Wall Street is gearing up for a week of high-stakes earnings reports from tech giants like Alphabet (Google’s parent company) and Tesla, as well as several other key S&P 500 players. This comes after a strong start to the earnings season, with 81% of the 14% of S&P 500 companies that have reported so far beating analyst expectations. Earnings growth is also on track to be at its highest since the fourth quarter of 2021, sitting at a robust 9.66%. While this initial success offers a glimmer of hope for continued economic resilience, investors will be keenly watching to see whether the AI hype translates into tangible growth or, conversely, puts pressure on profit margins.
Key Takeaways:
- Positive Sentiment: The initial wave of earnings reports has painted a positive picture, suggesting the US economy remains relatively strong.
- AI in Focus: AI will be a major theme this week, as investors assess how tech companies are integrating this transformative technology and whether it will drive revenue growth or create new costs.
- Earnings Beats Not Guaranteed: Despite the strong initial results, analysts remain cautious, recognizing that market volatility and global economic headwinds could still impact earnings potential.
A Week of Key Reports: What to Watch
Here’s a breakdown of what to expect from some of this week’s most anticipated earnings reports:
Tuesday, July 25th
General Motors (GM) is set to report earnings before the bell. Management will host a conference call at 8:30 a.m. ET.
- Last Quarter: GM exceeded expectations with a strong Q1 earnings beat and raised its 2024 guidance.
- This Quarter: Analysts anticipate earnings to grow by over 40% year-over-year.
- Key Watchpoints: Investors will be eager to hear about the company’s electric vehicle rollout, new gas-powered truck and crossover models, updates on the autonomous vehicle unit Cruise, and the company’s performance in China where it has faced challenges.
- Historical Performance: GM exceeds expectations 87% of the time and has recorded an earnings beat for the past seven consecutive quarters.
Tesla will report earnings after the closing bell, followed by a conference call at 5:30 p.m. ET.
- Last Quarter: TSLA shares jumped after CEO Elon Musk announced plans to launch an affordable EV by early 2025.
- This Quarter: Analysts polled by LSEG expect Tesla to report a 30% year-over-year earnings decline.
- Key Watchpoints: Margins remain a key concern, and investors will be looking for signs of pricing stability and growth in the full self-driving feature.
- Analyst Sentiment: Dan Levy of Barclays is cautious, warning of continued margin pressure. Ben Kallo of Baird is optimistic, citing potential for an earnings beat driven by a stable pricing environment, growth in the Energy Segment, and full self-driving revenue.
- Historical Performance: Tesla beats earnings expectations 62% of the time, but the stock has fallen after four of the last five earnings days.
Alphabet (GOOGL) will report earnings after the close, followed by a call at 4:30 p.m. ET.
- Last Quarter: GOOGL shares soared after the company announced its first-ever dividend.
- This Quarter: Analysts expect earnings growth close to 30% year-over-year.
- Key Watchpoints: Investors will closely watch updates on digital ad sales, specifically how AI is impacting performance, along with the company’s progress in artificial intelligence.
- Analyst Sentiment: Deutsche Bank’s Benjamin Black is optimistic, citing a strong ad market, AI tailwinds, and increased cost discipline.
- Historical Performance: Google historically gains over 1% on earnings days and has topped bottom-line estimates for five straight quarters.
Wednesday, July 26th
Ford Motor (F) will report earnings after the closing bell, followed by a conference call at 5:00 p.m. ET.
- Last Quarter: F earnings exceeded estimates as the company’s strong commercial unit offset EV losses.
- This Quarter: Earnings are expected to have fallen slightly for the automaker.
- Key Watchpoints: Investors will be looking for evidence of the success of the Ford+ restructuring plan , which prioritizes efficiency and profitability, specifically focusing on the Model e EV business, the Ford Pro commercial unit, and sales of traditional pickup trucks.
- Historical Performance: Ford earnings surpass expectations nearly 70% of the time, but shares tend to decline slightly on earnings days.
IBM will report earnings after the closing bell, with a conference call scheduled for 5:00 p.m. ET.
- Last Quarter: IBM reported another revenue miss and announced the acquisition of HashiCorp for $6.4 billion.
- This Quarter: Analysts anticipate flat year-over-year earnings and revenue.
- Key Watchpoints: IBM has outperformed the S&P 500 tech sector in the past month. Investors will be watching for signs that this momentum can continue.
- Analyst Sentiment: RBC’s Matthew Swanson is optimistic, expecting strong results driven by continued infrastructure outperformance and improving software results.
- Historical Performance: IBM’s profits consistently exceed expectations 84% of the time.
Thursday, July 27th
American Airlines (AAL) will report earnings before the bell, followed by a conference call at 8:30 a.m. ET.
- Last Quarter: AAL posted a loss but issued better-than-expected guidance.
- This Quarter: Earnings are expected to have fallen over 10% from the year-earlier period.
- Key Watchpoints: Investors will be looking for strategies to correct the company’s direct-to-consumer sales strategy which backfired earlier this year. Further, they will want insights into the company’s travel demand outlook and potential capacity cuts in response to increased flight operations. Labor negotiations with flight attendants will also be a key point of discussion.
- Historical Performance: American Airlines beats earnings estimates 88% of the time, but shares tend to remain flat on earnings days.
The AI Factor: Opportunities and Challenges
AI is expected to be a key discussion point throughout this week’s earnings season. While AI is undoubtedly a major catalyst for innovation and growth in the tech sector, it also introduces a set of challenges, particularly for investors.
- Investment Costs: Developing and integrating AI solutions is expensive, potentially leading to higher operating costs for companies.
- Competition: The race to develop AI-powered products and services is fiercely competitive, potentially forcing companies to cut prices or sacrifice margins to remain competitive.
- Ethical Concerns and Regulation: The ethical and regulatory landscape surrounding AI is evolving rapidly, creating uncertainty and potential risks for businesses.
Despite these challenges, the potential benefits of AI are undeniable. Companies are using AI to optimize operations, personalize customer experiences, and develop entirely new products and services. The success of this week’s earnings reports will depend on how companies are able to effectively navigate the opportunities and challenges presented by AI.
Navigating the Earnings Maze: What Investors Should Look For
Investors will need to look beyond headline figures like earnings per share and revenue growth. To make informed decisions, it’s crucial to dig deeper into the earnings calls and company reports. Here are some key areas to focus on:
- Margin Trends: Pay attention to profit margins, particularly how they are impacted by investments in AI and other growth initiatives.
- Guidance: Carefully analyze companies’ forward-looking guidance. Pay close attention to any changes in expectations or potential risks that might impact future earnings.
- Management Comments: Listen carefully to what company executives say during earnings calls, especially their tone and the insights they provide into ongoing operations, strategies, and challenges.
- Investment Strategies: Consider the impact of AI on company investment strategies, including research and development spending, capital expenditures, and strategic acquisitions.
This week’s earnings reports from tech giants and other key players will offer valuable insights into the state of the US economy and the potential impact of AI on the business landscape. Investors need to be prepared to navigate a complex and dynamic environment to make informed decisions about their portfolios.
