The pressure’s on for big tech firms, says BofA

All eyes are on the Magnificent Seven, say strategists at the banking giant, as earnings put promises around AI in focus.

The stakes are high for America’s technology behemoths to start delivering on artificial intelligence promises with their earnings poised to decelerate, according to Bank of America Corp. strategists.

Microsoft Corp., Google parent Alphabet Inc., Meta Platforms Inc. and Tesla Inc. report results this week, kicking off earnings for the so-called Magnificent Seven. The group is still expected to post growth of 39% from the first quarter a year ago, but that’s down from 63% in the final three months of 2023, per BofA’s estimates. With AI seen as the key to future profits, its contributions to the earnings mix is a key focus for traders, a BofA team including Ohsung Kwon and Savita Subramanian wrote Monday in a note to clients.

Big Tech’s earnings spotlight comes on the heels of the Nasdaq 100 Index’s worst week in about a year-and-a-half with a 5.4% plunge, leaving investors on edge about whether profits will be enough to reverse the swoon. The tech-heavy benchmark is down 6.5% in April and on track for its worst month since December 2022.

Part of the issue is the companies face tough year-over-year comparisons after bumper megacap tech earnings last year. But this is expected to be the start of “what could be a multi-year AI investment cycle,” according to the strategists. Success will mean balancing that expansion with the costs to feed it.

“AI contribution will be the key focus, but the AI capex outlook will be equally as important,” Kwon and Subramanian write.

Semiconductors are so far the biggest beneficiaries of the technology. But more esoteric plays in AI infrastructure companies, like power grids, have also benefitted.

Outside the Magnificent Seven, the remaining companies in the S&P 500 Index are expected to see earnings decline 4% in the first quarter from a year ago, according to Bank of America. But 25% of stocks in the broad equities benchmark are likely to see positive and accelerating earnings per share growth in the first quarter, per BofA data.

The growth gap between the Magnificent Seven and the rest of the S&P 500 will likely close by the fourth quarter, the bank strategists predict, leading to a rotation away from technology and toward value-oriented stocks.

It’s a view that was also expressed earlier on Monday by Jonathan Golub and his team of strategists at UBS Group AG, who cut their sector recommendation on the “Big 6” technology stocks, which is the Magnificent Seven without Tesla. Golub and his team also expect a deceleration in large-cap tech and an acceleration in mid-cap tech to spur a reversal in equities leadership.