![AI Spending in the Spotlight as Big Tech Enters Make-or-break Week](https://news7g.com/wp-content/uploads/2024/07/107250892-1685971223494-gettyimages-1258377934-AFP_33GU4HE-780x470.jpeg)
This week’s key earnings reports from the biggest tech giants could set the tone for the near future as Wall Street looks for signs that massive investments in AI are paying off. Underwhelming results from Alphabet and Tesla sparked a brutal sell-off, raising questions about how long it will take for the AI narrative to come to fruition. Wednesday’s session saw the biggest declines in the tech-heavy S&P 500 and Nasdaq Composite since 2022, resulting in a loss of more than $750 billion among the “Fantastic Seven,” according to Morgan Stanley’s trading desk. The Roundhill Magnificent Seven ETF (MAGS) is now down 11% from its high. MAGS Magnificent Seven ETF YTD Performance on the Mountain This sets the stage for a “make-or-break week” that coincides with the Federal Reserve’s July interest-rate decision on Wednesday, according to Chris Senyek of Wolfe Research. Microsoft reports on Tuesday, followed by Meta Platforms on Wednesday and Amazon and Apple after the bell on Thursday. Last week’s action puts a microscope on AI spending. For months, tech giants have been touting their AI plans and ambitious visions. Now, more than 18 months after the groundbreaking launch of ChatGPT, Wall Street wants results. “We expect them to have solid earnings. We expect them to beat their EPS,” said Jay Woods, chief global strategist at Freedom Capital Markets. “The focus now shifts to AI demand—that they’re spending to meet that demand and that they’re finally seeing the benefits of that spending.” The rush to compete has created a fear-of-missing-out mentality. Alphabet CEO Sundar Pichai noted on the earnings call that “the risk of underinvestment is significantly greater than the risk of overinvestment.” But most of the AI revenue gains so far have come from cloud businesses that train and run large language models, while gains elsewhere appear to be “more qualitative,” Deutsche Bank’s David Folkerts-Landau noted. “Tech companies are competing to lead the AI race because high costs, scarce semiconductor resources, and the pace of progress make investment a zero-sum game,” the group’s chief economist wrote in a note on Tuesday. “There is probably only room for a few champions. Anyone who blinks for a second risks falling light years behind everyone else.” So as companies continue to pour money into AI projects, Baird’s Ted Mortonson expects the rewards to be delayed until 2025 or 2026. Is a sell-off underway? Some Wall Street analysts believe strong quarterly results may not be enough to reverse the decline in tech stocks. “We believe the recent market swings still have room to run, with the Fed expected to cut rates by at least 25%,” he said. [basis points] “The recent sell-off could also be a factor in some of the volatility from here,” Senyek wrote. “The recent sell-off could also be dampening expectations for these companies with already high forecasts, T. Rowe Price portfolio manager Dominic Rizzo told CNBC’s “Close Bell: Overtime” on Monday. “I think the bar has come down,” he said. “My intuition is that tech earnings are going to be better than people expect.”