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 (MSFT), Apple (AAPL), Meta Platforms (META), and Tesla (TSLA) — 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 has stalled in recent weeks after previously being the primary engine of the bull market entering its fourth year. Tech has been the worst-performing S&P 500 sector since the end of October, while the benchmark index has risen 2% for the year, buoyed by strong performances in materials, energy, and industrials.
Despite this, the broader market may struggle to rise further if tech and megacap stocks falter, given their significant influence on major indexes. A solid gain for the tech sector on Tuesday helped the S&P 500 reach a record-high close. The tech sector accounts for one-third of the overall S&P 500 weight, and the Magnificent Seven comprise approximately one-third of the S&P 500.
“You can only get so much (market rotation) if the Mag Seven stocks are going down in unison,” said Matthew Maley, chief market strategist at Miller Tabak. “They’re too highly weighted in the indexes. They go down, the indexes go down. The indexes go down, people start pulling money out of the stock market.”
A critical question for all U.S. companies during this fourth-quarter reporting period is the extent to which they have seen or can project tangible benefits from AI spending. This is particularly relevant for hyperscalers such as Microsoft and Meta, which are investing heavily in building out data centers and infrastructure to support AI applications.
Investors will closely monitor how these earnings reports reflect the companies’ ability to harness AI technologies for revenue growth. The potential impact of AI on profitability could redefine performance metrics for tech giants and influence investor sentiment moving forward, especially as competition intensifies in the sector.
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