The five tech giants' financial reports are all out this week, is Mag 7 still the "source of growth"?

As the earnings season for US stocks reaches its peak, this week, five tech giants in the Mag 7 - Google, Meta, Microsoft, Amazon, and Apple - will successively release their latest financial reports. Can tech stocks sustain their upward momentum?

Wall Street predicts that the profit growth rate of the Mag 7 in the third quarter will increase by more than 18% year-on-year, a significant drop from the 37% in the second quarter, but is expected to continue to outperform the overall S&P 500 profit growth rate by about 3-4%.

Among them, Alphabet, the parent company of Google, is expected to achieve double-digit percentage revenue growth, while Apple, Meta, and Amazon will only see single-digit revenue growth.

Analyst Ido Caspi from Global X predicts that the overall profitability of tech giants in the third quarter will continue to be robust, with AI commercialization showing initial success:

"Overall, we expect the profitability of large tech companies to demonstrate stable operational performance, revenue acceleration led by artificial intelligence, and continued healthy and innovative resilience in advertising revenue."

"More importantly, we expect to see more evidence of generative AI evolving along its growth curve and continuing to transition from experimental stages to widespread commercialization."

Are tech stocks still a source of growth?

Although tech stocks were the main driving force behind the S&P repeatedly hitting historical highs in the first half of the year, market funds have started to shift towards industries such as real estate, utilities, and finance due to multiple factors such as the Fed's rate cuts. Investors are beginning to doubt whether AI can truly bring growth potential to tech companies.

Since July 10th, the cumulative return of the Mag 7 has significantly lagged behind other industries, recording a 2% decline, while sectors including utilities, real estate, finance, and industrials have all risen by over 10%.

Furthermore, the valuation of the Mag 7 remains at historically high levels. For example, Apple and Microsoft have forward P/E ratios of 32 times and 33 times, respectively, exceeding their average levels of the past 10 years (20 times and 25 times).

Michael O'Rourke, Chief Market Strategist at JonestradingInstitutional, commented:

"While the earnings (expected) of the S&P 500 index (excluding the Mag 7) have hardly grown, its valuation is more attractive."

In addition to macroeconomic factors, tech giants also face tougher regulations, massive AI capital expenditures, and other challenges. Ross Mayfield, an investment strategist at Baird, predicts that tech stocks may find it difficult to regain their leading position by the end of this yearHowever, despite the expected slowdown in earnings for tech giants this quarter, Wall Street remains optimistic about their prospects.

Data compiled by Bloomberg shows that approximately 90% of analysts have buy ratings on stocks of Microsoft, Alphabet, and Nvidia. The percentage of buy ratings for Alphabet is 83%, Apple is 65%, while the average level for the S&P is only 53%.

Andrew Choi, portfolio manager at Parnassus Investments, stated that despite various concerns, compared to other sectors, tech stocks still offer above-average profit growth, exposure to artificial intelligence, strong capital returns, and lower risks.

Ross Mayfield stated:

"Clearly, profit growth (of tech companies) is slowing, and valuations may be a bit high. But they still bring such significant growth, and there is still significant upside potential in earnings in the coming years."

Mark Malek, Chief Investment Officer at Siebert, remains bullish on the outlook for tech stocks, saying:

"I know there are many prominent asset managers coming out saying 'we're not buying anymore,' but the data is still good. Where else can you get this kind of growth potential compared to other industries?"

What is the Market Focusing on?

Malek from Siebert believes that in terms of specific company earnings reports, he will focus on the following:

Google: The progress and commercialization of the AI assistant Gemini, including how Gemini forms a new business model with advertising, YouTube, and cloud services.

Meta: Updates on the Llama model and advertising revenue on platforms like Instagram.

Microsoft: Revenue from cloud services and updates on the Copilot AI assistant.

As for Apple, the company is still facing doubts about whether the AI-enabled iPhone 16 can trigger an "upgrade cycle." Analyst Dan Morgan from Synovus believes that investors will focus on whether the company's core retail business will improve.

Furthermore, AI-centered capital expenditures will continue to be a major focus in the market.

Bloomberg estimates that Microsoft, Alphabet, Amazon, and Meta are expected to collectively invest around $56 billion in capital expenditures, a 52% increase from the same period last year