US megacap results to test market's tech trade, profit optimism

By Lewis Krauskopf

NEW YORK, Jan 28 (Reuters) - Stakes are high for earnings reports from U.S. megacap companies this week, as investors seek proof that strong profit growth will lift stocks this year, including evidence that artificial-intelligence investments are paying off.

Reports are due from Microsoft, Apple, Facebook parent ​Meta Platforms and Tesla - four of the "Magnificent Seven" megacap companies whose bottom-line results broadly are key drivers of overall U.S. profits. The group is expected ‌to post a 21.5% rise in earnings for the quarter, compared with a 5.3% gain for the rest of the S&P 500, according to Tajinder Dhillon, head of earnings research at LSEG.

"Expectations are very ‌high," said Anthony Saglimbene, chief market strategist at Ameriprise Financial. "Particularly for Meta, Microsoft and Apple this week, there is less room for them to disappoint."

The technology sector stalled in recent weeks, after the group had been the primary engine of the bull market that is entering its fourth year. Tech has been the worst-performing S&P 500 sector since the end of October. The benchmark index is up 2% for the year, as other groups have shined, including materials, energy and industrials.

Still, the broader market may be hard-pressed to rise much ⁠higher if tech and megacap stocks struggle, because of their ‌huge influences on major indexes. Indeed, a solid gain for the tech sector on Tuesday helped lift the S&P 500 to a record-high close.

The tech sector accounts for one-third of the weight of the overall S&P 500. The Magnificent Seven also make up about ‍one-third of the S&P 500. The group includes Apple, Microsoft and Nvidia, which are classified in the tech sector, as well as Meta and Google parent Alphabet from communication services, plus consumer discretionary members Amazon and Tesla.

"You can only get so much (market rotation) if the Mag Seven stocks are going down in unison ... They're too highly weighted in the indexes. They go down, ​the indexes go down," said Matthew Maley, chief market strategist at Miller Tabak. "The indexes go down, people start pulling money out of the stock market."

A critical question ‌for all U.S. companies during the fourth-quarter reporting period is the extent to which they have seen or can project tangible benefits from AI spending.

That is particularly the case for hyperscalers such as Microsoft and Meta, which are spending massive amounts to build data centers and infrastructure to support AI applications.

"Investors want to hear that the capital spending, that particularly Microsoft and Meta are doing, is going to continue, and they see very visible monetization or earnings coming from this spending," Saglimbene said.