Wall Street's 'Magnificent Seven' Brace for Earnings Season Challenges

As tech giants Microsoft, Amazon, Meta, and Alphabet- known as the "Magnificent 7"- brace themselves for their upcoming earnings reports, which make up roughly a quarter of the S&P 500's market cap, the market continues to navigate uncertainty following Tesla's disappointing results last week that led to a 10% decline in stock value.

The blended earnings growth estimate for the S&P 500 index in Q3 2023 is 1.2%. However, the growth rate rises to 5.8% if the energy sector is excluded. At present, 86 companies within the S&P 500 have reported their earnings for Q3 2023, with 77.9% of these firms surpassing analyst expectations. This positive development exceeds the long-term average of 66%.

Moreover, the Q3 2023 Y/Y blended revenue growth estimate is 0.9%. If the energy sector is removed from the index, the growth rate increases to 3.4%.

However, the fact is that the S&P 500 index is expected to benefit from outstanding performances and significant year-over-year growth rates in the tech industry. The exclusion of these tech giants would result in a 5% drop in average earnings for the S&P 500.

Here are some highlights of the coming "Magnificent Seven" earnings:

Investors will be keen to understand the progress and returns on this significant investment, particularly as Microsoft has incorporated OpenAI's language models in its Bing search engine and Edge browser.

SeekingAlpha analyst Brian Gilmartin suggests that the release of Copilot could impact the December '23 quarter's results, with investors eager to quantify the effects of AI initiatives following the hype surrounding Spring '23. Despite this uncertainty, EPS, revenue, and stock trading trends indicate that Q3 2023 will likely align with expectations. Microsoft is expected to remain at the forefront of AI technology, as it did with cloud computing in previous years.

In addition to AI and the cloud, Microsoft investors and analysts will be keen to receive updates on the impact of its $68.7 billion acquisition of Activision-Blizzard, the company's largest deal to date. The acquisition was completed on Oct. 13, after the close of the recent quarter, and as a result, Microsoft's Q3 earnings report will likely provide insights into the long-term outlook for the company following the 21-month regulatory review.

The cloud service segment is the focal point of Alphabet's Q3 earnings report. The company is expected to benefit from its robust cloud division, contributing substantially to revenue growth. Additionally, Alphabet's continued expansion of data centers will strengthen its presence in the cloud space.

In Q2, Alphabet's Google Cloud segment recorded a year-over-year revenue growth of 28%, demonstrating the strength of its cloud business. Its AI-optimized infrastructure drives adoption, with over 70% of AI startups partnering with Google Cloud.

The company has provided Q3 revenue guidance of between $32 billion-$34.5 billion, while Wall Street analysts expect revenues of $33.4 billion for the quarter. Even at the lower end of its guidance, Meta's Q3 revenue growth should be the highest since Q4 2021. In addition, CEO Mark Zuckerberg's efficiency and cost-cutting measures have propelled the company's stock price to exceptional highs, and investors are keen to learn about his plans for new product investments and future hiring strategies. They are also interested in finding out if Threads, Meta's text-based platform competing with Elon Musk's X, has been able to retain users after a rocky start.

UBS analyst Lloyd Walmsley remains optimistic about Meta's prospects, stating that despite elevated expectations into Q4, the GenAI consumer app bull case still needs to be appreciated and not priced into shares.

Furthermore, Nvidia's expertise in AI chips will result in robust third-quarter earnings. Its earnings per share are forecast to increase by nearly 475% from a year ago. FactSet predicts that Nvidia's earnings will be the most significant contributor to profit growth for the entire S&P 500 index in Q3. This expansion into the personal computer chip business, combined with its longstanding expertise in AI technology, positions Nvidia well for continued growth and market leadership in the future.